How much cash flow makes for a good deal?

Question

I’ve got a property under contract for $161k in a strong rental market. It’s a ranch, with a full/ partially finished basement. I’m going to turn the basement into a second unit. The house was built in the 50’s and has a lot of deferred maintenance, interior and exterior. I’m looking at about $130k remodel, upstairs and downstairs, plus contingency. Mortgage would be about $2k/month, and full rental rate would be about $2400/month. Would you feel good about this? It’s in a booming/ appreciating market. I feel good, but checking in...

Adam Detig · Answer

@Nate Bell No absolutely not. The $400 profit only after mortgage payment is no where near enough. You also have to take into account vacancy, repairs, property management costs, possible pest/landscaping costs.

The general rules you will find on BP is that 50% if your rent will go to expenses (what I listed above), and then the mortgage payment comes out of the other 50% and any left over is true profit (typically aiming at $100 per door).

Hope it helps.

Edward Liu · Answer

This is not a good deal based on cash flow.

Nate Bell · Answer

@Jason DiClemente it’s a 203k rehab loan. I’ll put about $32k down. This area is tough man, everything is expensive. And yes, I could scale back the remodel a little, but I don’t wanna be a typical (don’t take this the wrong way) “slum lord”. I want to rent a nice property to nice folks with good jobs.

Kenneth Garrett · Answer

@Nate Bell

After all of your expenses my goal is to cash flow $300 for SFH and $200 for per door in a multiunit building.  I agree with @Adam Detig you need to account for all of the expenses.  This looks very tight.  60 days of vacancy will almost eat up all of your cash flow not counting maintenance and other expenses.

Good Luck.

Nate Bell · Answer

@Henri Meli

Maybe so, but at this point, I want to have an eye on my investments. And I’m guessing that the appreciation there is minimal. This property will probably double in value over 20 years.

And no, I’m doing a 203k. Putting about 32k down and the rest is financed through the rehab loan.

Henri Meli · Answer

@Nate Bell . I'm curious if the $130k will come out of your own pocket?

If true, then do you believe it is the best use of $130k?

You could buy very solid 4 units dwellings (all cash) with this money in certain parts of the country. And rent for really good money.

How much cash flow makes for a good deal?

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