Is newbie's deal analysis too conservative?

Question

I'm looking at a SF property. I want to get the community's thoughts on the analysis of this deal. Am I being too conservative, or is this just a bad deal?

Asking - $110K
ARV - $125K

Potential rent - ~$1300/month
Required cash flow - $200/month

Monthly expenses:
- Vacancy - $110 (1 month/year)
- Taxes - $250
- Insurance - $90
- Management - $130 (10% of rent)
- Maintenance - $130 (10% of rent)

Rehab - ~ $5K

Purchase costs - ~$9.5K (Closing costs, Finance costs, Holding costs, Management setup, Appraisal, Risk insurance, Inspection, Misc.)

Maximum purchase price = Rent - Required cash flow - Expenses - Rehab - Purchase costs = ~44K (assuming 7% interest)

With asking price being ~$110K, I don't see $44K being accepted as a top offer. Even if I use the 50% rule, I'm still at around $50K or so. Am I being too conservative here by including too many costs or are some costs too high? Or is this just not a good deal to even pursue?

Thanks a lot.

Jon Holdman · Answer

You're 10 miles west of Detriot.  I'm sure you can find significantly better deals than this one within half an hours drive.  The one described here, for example.

Jon Holdman · Answer

Sounds like you're dealing with portfolio lenders and/or commercial loans.  For conventional, conforming loans, 30 years is possible, or at least was a year ago.  If you already have four mortgaged properties, you may be stuck with commercial terms.  In theory, you can still get Fannie Mae type loans for 5-10, but I hear its difficult to find those lenders.

Kenneth LaVoie · Answer

Jon
Where are you finding 30 year mortgages for rental props? I have asked pretty much every local and big bank,and even with 25% down, it's 20 year max, 3/3 or 5/1 ARM. I did find ONE bank, that would do 15 year fixed for about 7%.  I keep hearing people, especially on bigger pockets advise to not even THINK about adjustable rate but .... without hiring a team of investigators, that's all I've found to exist. I think I've opened a thread or two on the subject.  It just seems that 30 year financing is used alot to talk about analyzing deals, so I assume that SOMEBODY must have found it somewhere. Thanks much.

Jean T. · Answer

Thanks William.

I definitely must be looking in the wrong places, because I am not seeing those deals. I've been focused on the MLS so far, so maybe that's it.

I was out with my agent today looking at properties in Livonia and Farmington Hills. The cheapest one was about $75K, and it was terrible. It probably needed at least $20K of work.

What kind of rehab are you doing for these $35K properties?

William Ware · Answer

Jean
Some very good advice from Jon and other posters. There are several areas in SE Michigan that offer up much better deals than the one above. Personally I'm a buy and hold investor in Washtenaw and Wayne county...and have found several great deals with tremendous ROI for less than 35k. Keep pursuing and increase your due diligence and I'm sure you will find a great property. By the way Canton and Plymouth are great areas with terrific schools.

Jean T. · Answer

That's a good thread. Thanks for the link.

I saw that Canton was mentioned as one of the "good" cities, and that is where this property is located. But I have to suspect that there are some lower priced homes there. Just gotta keep looking.

Jean T. · Answer

Maybe I haven't looked at enough properties, but in my area, the $60K properties usually need much more than a $5K rehab. Right now, I'm going through MLS, and maybe that's the problem. I know I have to use other ways to find property, and I plan to start doing that.

I'm looking to buy cash flowing properties. As everyone knows, we're not seeing much appreciation in Michigan, unless it's forced appreciation. So I have no intention of buying and not caring about cash flow.

Thanks for the advice. I guess I'll keep looking.

Joel Owens · Answer

Try to find other areas for lower prices with better rent ratios.

Here in Atlanta you can get a property for about 15k with 550 to 600 a month in rent.

Where I live In Cherokee county that same property is about 60k.Tenant class would be about the same.

The LAST thing you want to do is saddle yourself with a high debt service and mortgage that cripples you from doing the better deals.

I see it a lot where an investor buys a house and pays to much for it.Any little problem goes wrong like eviction and tenant damage or unanticipated repairs and you are now in the red.

Many bought houses in your range when the market was hot in my area for appreciation.They didn't care if it cash flowed as the appreciation they could just refi out and make money that way.

Sometimes people will buy something just as a tax write off to show losses and other times if you break even but the old property is sitting on future commercial land  or other potential develop you can make a great return that way.

If it's a house in a subdivision there is only so much you can do for an exit and return strategy.The numbers you have given I would not do the deal.

Jon Holdman · Answer

This is a marginal deal, IMHO, with conventional financing.  Any sort of alternative financing (I assume you mean hard money, since no bank is going to give you "owner financing" at anything other than their usual rates) is going to be much more expensive.

Jean T. · Answer

Thanks Jon. This very helpful.

According to the agent I'm working with, the bank MAY accept something around 90-95K. So we'll see. I haven't decided whether I'll put in an offer or not.

The 25% down is not something I'm in a position to do. I've already discussed that with my mortgage broker. So I guess I'll have to look for some alternative financing and see if it still works.

Thanks again.

Is newbie's deal analysis too conservative?

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