Help me analyze this deal

4 Replies

Hi @Phillip Mitchell , first off I just want to say that I am also an absolute newbie and just starting analyzing deals.  I looked at your analysis and a couple things came to mind, not sure how relevant they are since I'm just as green as you but I figured it'd be worth starting  conversation and maybe we can both learn a little from each other.

First thing I noticed is that you didn't include anything for Property Management.  Totally fine if you want manage yourself but when I'm analyzing I add it in because even if I manage myself now, I know that over the course of the 30 year mortgage I'm absolutely going to want to pay someone to do it.  That 10% management fee is going to eat up your entire cash-flow.

The next big thing is that you didn't include Mortgage Insurance, you will likely need to pay mortgage insurance if you plan on using that low of a down payment.  Calculating this is something I'm struggling with when analyzing my own deals so I can't help much there.  I also noticed that you didn't include water & sewer, totally fine if you are going to make your tenant pay but I've heard some areas won't let you charge your tenant for that utility so that could be worth checking in your area if you haven't already.   

Another thing is your closing costs, you say $4000 for CC but when I calculate 3% of your purchase price I get $4,140, its a small difference but it seems like you are also forgetting to add in cost of appraisal and inspection.  My loan officer gave me some general price ranges for appraisals and inspections and I've been adding about $1000 to my closing cost when analyzing deals to stay safe.

Lastly, in the comments you say that you don't plan on living there and will immediately rent it out.  I'm not sure if this changes by area but my loan officer said that if you don't plan on living at the property it is considered an investment and you cannot get a loan for less than 20% down.  If this also applies to your situation its not even a matter of is this a good deal its more like you might not be able to finance it anyway, unless you can afford the 20% down of course (I certainly can't for my first deal). 

Okay, @Phillip Mitchell . A few thing at the out set:

  • If you don't plan to live there you will have to put down 20-25%. 
  • Expect an interest rate in the 4s.
  • Usually when someone says "buy it out right," they mean pay all cash. Not trying to be pedantic, but the specifics matter.

As far as your analysis:

  • Include an initial repairs budget. There's always something!
  • Vacancy of 5% is probably fine for SFR.
  • Your CapEx and Repairs are a little lower than I usually use (I like 15%), but this place looks pretty new so you should be okay. Just expect that if you own long term that you'll slowly bump it up.
  • Insurance looks a little high. Talk with a local insurance agent.
  • You left out Management (10-12%). Always include Management, even if you plan to self-manage at first.

My math puts you cash flowing <$90/month. This property doesn't hit the 1% rule and has an HOA. Keep looking.