Opportunity - first buy

[Steven Arnold]

Hello BP community, 
I have the opportunity to purchase a 2 bed 1 bath ~800 sqft home within a few miles from me. The owner is a REI but does not live in the area nor has a PM. currently rents it out at $600/month. He is asking $108,000 for it. Although the bones are good it needs some work. Cabinets, floors, plumbing, electrical etc. This home is smaller and cheaper than anything listed within my area, where there is a housing/rental shortage. La Crosse, WI area. I'd like to purchase this property but offer below asking price, any idea on how to proceed respectfully in this situation with the owner? Is this not a good first buy for my portfolio?

[Nathan Grabau]

What are the rental comps in the area? I agree with you that 108k seems too high for the current rent, especially if it needs work. In high cashflow markets, which since this is a sub 200k home this should be, I am looking for 0.8-1.0+% of a property's value to be collected each month in rent. That being said, as the sales price and rent gets smaller, it needs to sit closer to the high side, because some costs like furnaces or hot water heaters are less dependent on the value of the home. 

If you need to put some money into it, with where interest rates are today, my "phase 1" underwriting check at the price point would be "Can I get rents to 1% of the purchase price plus rehab costs?". You have to run real numbers a monthly/ annual basis and do a deeper dive, but this is the back of the envelope math that lets you figure out whether to dig further into this deal, or if maybe you guys are way to far off. 

You can always say to the REI "I am not sure if you are going to like my number, do you want me to tell you it anyway?" This balances your desire to be respectful, but also gives you a shot at getting the property still, at the right price.