Does this look like a good deal? My first ever

Question

Hi Everyone,

I am a REI newbie looking to purchase my first investment property soon. I came across a wholesaler in my area (which is expensive from property tax viewpoint), who has a deal for me. It looks all right but I wanna make sure my strategy is proper and see what you guys think. Thanks in advance for your time.

Duplex, (currently in rent condition, but could use some repairs and new hardwares, close to college in a small town, lower income area, no significant appreciation expected)

Asking 125k

1-hr drive distance

rent 2000 (tenant pays electricity heating water)

It is nice to meet the 1% rule but it requires all cash purchase or hard money loan, which is the biggest headache, but not impossible with all cash.  I could use delayed financing exception to pull my fund back right after without waiting 6 months. This is where I am not very sure since I have never done this before. But my calculations are

Appraisal 160K

LTV 70%

Loan 112K (lower than borrower's contribution in the deal so this is what I get)

So my total output: 125K (purchase) + 3k (est closing) + 5k (rehab) = 133 K

minus the loan 112k

out of pocket left in the deal 21k

My monthly cash flow

mortgage 600

property tax 340

expenses: 300 (trash snow sewer insurance)

cash flow = 2000 (rent) - 600 (mortgage) - 340 (tax) - 300 (expenses) = 700 (to round it up)

cash on cash return = (700*12)/21000 = 40%

Which is probably not a great return in many people's mind. I am considering moving forward, but my questions

1. Can i surely get delayed refinance? If I cannot, I would be stuck. What are the rate and term like? Would it be 30 year and market rate?

2. Does the purchase price look too high, since I will end up leaving money in the deal rather than pulling everything out through the loan.  I guess potentially with some rehab the value could go up to 170k, so 70% would be 119K.  I still would not be able to get my rehab cost out.

3. I am not considering the repairs and the PM in the analysis. PM could be another 200 eating into the cash flow which would lower the return to just under 30%.

4. PM said a rehab of 10-15K could improve the conditions quite a bit and be made more appealing to renters.

Is this something I should seriously pursue?

Thanks all,

Brandon Frulla · Answer

@Chris Yuan how sure are you that the rehab is only $5k? Have you had a contractor walk the property with you and give you an itemized list that comes out at $5k? If not, I would suggest that before proceeding with any final decisions.

Also, something subtle that I noticed, you said “to round up” at the end of your calculations for COC return. I would say that you should be very deliberate in your calculations, and never round up. You could end up romanticizing a property and get stuck buying something that you’ll regret.

Sam Shueh · Answer

You are better off go to mid America. Price is lower possibly better appreciation.  The last thing you want to do hire snow removing service and get sued for things you have no control.

Caleb Heimsoth · Answer

You need to find similar property sales in the last 6-12 months a mile or less from the property.  A real estate agent can do this for you.

All the stuff you listed is not good for evaluating ARV

Chris Y. · Answer

@Sam Shueh Snow is about 120 per month by landlord, accounted for in expenses.  That is the downside of living in a snowy state.

Chris Y. · Answer

@Caleb Heimsoth  Is there a good way investors can use to estimate the appraisal value? I can only find the last sale price, zestimate, and the town assessment. The zestimate is about 180K while the town assessment is 160k and last sale is 165k.

I understand the appraisal value ultimately decides how much loan I can get and how much I will leave in the deal

Chris Y. · Answer

@Brian Zaug Good questions.  The tenant would pay for water, heat, electricity.  I have to find out about the lawn.  Also, do you mean I could do another cash out refinance if the appraisal can be over 180K? For now, I would have to pay all cash for the purchase, and then do a delayed financing exception to get my fund out.

Sam Shueh · Answer

Snow removal to be taken care by tenants?

Chris Y. · Answer

@Brandon Frulla  the duplex just recently rented out, so I guess it is now in okay condition. I called the current PM and found out that a paint job and some new heaters could be added, which could cost 10-15k, but if I just want to keep it as is, then I do not need much. Again, it just got rented out.

It is good advice to have some contractor walk through and offer some solid cost estimate on the rehab. Thanks,

Caleb Heimsoth · Answer

@Chris Yuan the tax appraisal is a joke when finding fair market value.  Do not base

Your ARV on that.  At first glance it doesn’t look awful but you need to account for maintenance and nail down your ARV

Brian Zaug · Answer

Seems like a pretty good deal but I have a few questions.

Who pays for water?

Who pays for lawn/garden maintanance?

Tenants pay electric, does the building have electric heat?

Any cap-ex projects coming up in the next 5 years?

Perhaps after a few years and some rent increases, you can get the appraised value over 180K allowing you to pull all you money out.  But even still, leaving 21k in a deal that cashflows over 600 a month seems to be good in my opinion...

Brian

Poughkeepsie investor

Does this look like a good deal? My first ever

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