SFH deal analysis -- thoughts??

Question

Details: DSFH built in 1970. Rents for $750/month. Current owner is paying for new roof.

P&I, tax, insurance: $327

CapEx: $100

Repairs: $100

Vacancy: $37.50 (5%) _________________________________________

$564.50/month cost

So, $750 (monthly income) - $564.50 = $185.50/month = 185.50*12 = $2,226

___________________________________________________________

Down payment: $14k (20%)

Closing costs: $2k

= $16k

___________________________________________________________

$2226/$16000 = 13.9% CoC ROI.

Should I do it?

Russell Schoepf · Answer

Hey Keegan, I work with All County Expert Property Management here in Atlanta. I agree with Mitch that your vacancy rate is too low. Here in Atlanta it is especially important to have a strong understanding of the surrounding area your rental is located in. Your coc return can go south quickly with eviction proceedings and unexpected capx issues once your tenant moves in. You need a quality contractor to provide an accurate rehab budget. This should be included with your down payment to get the most accurate coc return. Being a property manager for several years as well as being a certified home inspector, I have managed any issue you could imagine. Was this property in South Atlanta? Please IM me if you have any questions, good luck!

Jaysen Medhurst · Answer

@Keegan Darby, I bet you cash flow ~$125/month on this. That works out to be ~9% CoC ROI. Not good enough for me, but you need to determine your own criteria.

Following up on @Mitch Messer's points: Always include Management! I'm okay with 5% vacancy on a SFR, depending on the market. They tend to draw families that stay longer. You're CapEx and Repairs expenses are equal to ~25% of rent. That's high, but with such an inexpensive property, you have to bump it up. May be a good idea to plan out each CapEx item with its current expected remaining life and inflation-adjusted future costs. Then you can work that into your numbers.

Mitch Messer · Answer

Hi @Keegan Darby and welcome to BiggerPockets!

Regarding your analysis, a few concerns spring to my mind:

• Initial Repairs and Deferred Maintenance - Beyond the roof, there are likely more than a few other items that a 50-year-old house will require to be rent-ready. I don't see that factored into your numbers. This repair budget will definitely impact your cash-on-cash return. (Your $100 "repairs" line item is really for ongoing maintenance, I suspect.)
• Vacancy - A 5% vacancy rate means you expect the property to sit empty just one month out of every 20, or nearly every two years. That has not been my experience: How did you settle on that estimate? In Atlanta, I usually assume 8.3% of rents for vacancy.
• Property Management - There is an unavoidable cost to manage a rental: tenants must be screened; leases must be signed; rents must be collected; maintenance requests must be managed, etc. Whether you perform this function yourself (not recommended!) or hire a professional, there needs to be a line item for this expense. It is not optional. In the Metro Atlanta market, management runs about 10% of collected rents.

Jonathan Greene · Answer

My response would be that none of that matters unless you have a bunch of properties already and use this analysis as a closing tool. If this is your first and second, what you are presenting is just a numbers view and the best deals are always viewed outside of the calculator as much as inside, if not more. I also agree with all of @Mitch Messer's points which is why straight calculator reliance or opinions based on it are not going to be accurate.

Russell Schoepf · Answer

Last comment, I have seen many shotty roof replacement jobs. The seller will most likely go with the most affordable option available. You need to vet the company they used and see if they are insured and there a warranty on their work

SFH deal analysis -- thoughts??

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