First time investor. Is this a good deal?

Question

hello all,

I'm from southeast iowa and I was hoping to run some numbers in front of all the investors on BP!

I'll get right to it. The house I am looking at buying is a 1200 sq ft house with 2 bedrooms, 2 bathrooms, and a 768 sq ft garage all built in 2000.  The house is sitting on 0.4 acre lot.

The house is selling for 65000 and I believe rent would be 650 to 700 but I've been running the numbers at 650.  The 2% rule shows me that I am only at 1%, but I know that could vary with the area you are in. I'll make a list of expenses I think I will encounter.

Purchase - 65000

Rent-  650

Taxes monthly - 105

Insurance monthly- 62

Vacancy 5% - 32

Repair 5% - 32

Mortgage - 278

All that puts me at 509 expenses versus 650 rent to be at 141 cash flow monthly.

I have calculated the CoCR a couple different ways because I am certain that the house is rent ready now but I also figured it with some rehab expenses just in case I find something.

141x12= 1692

1692/16000(down payment plus closing)= 10.5% CoCR

1692/18000(down payment, closing, and 2k rehab) = 9.4%

Like I said before 650 seems like the safe route for potential rent. A couple other things I haven't mentioned are that the house is assessed at 64610 and the interest rate on the mortgage is 4.5% 30yr.

What do you all think? I'm trying not to confuse myself so much that I go crazy. I honestly want to do this so bad but I always seem to find a reason not to and the reason on this house for me is the lower CoC return. I think I would like to see closer to 15% but what do I know!

Sorry for rambling. Let me know what you think! Thanks!

Chris Pohlson · Answer

Questions and thoughts:  Insurance seems a little high.  You budget for maintenance but not for Capex?  I assume you're going to manage it yourself.

If I evaluated that property I would use 8.33% for vacancy (equivalent to 1 month's rent) and another 5% for Capex.  That would put your monthly cash flow at a little less than $100/mo.  If you put $15k in (down payment and closing costs) that would give you a CoC return of around 8% based strictly on cashflow.

Everybody's criteria is different.  Could you find something better?  Maybe.  Could it take you a while?  Maybe.  Should you get in the game sooner than later?  Yes.

Good luck!

Kyle Carpenter · Answer

thanks for the replies!

I will be managing myself so I will be taking care of snow and grass depending on whether the tenant is up for it.

The insurance I quoted was for replacement cost.  I know some people say to just insure for dwelling value but it was only $11 cheaper per month!  I suppose that will add up fairly quickly.

The 8.33% for vacancy is probably a smarter number especially since there is no tenant yet.  My area also has limited houses that have the purchase price this close to assessed value.  Speaking of that, I have been thinking of the tax incentives like depreciation and writing interest and things off.  My estimate is that the income from rent (7800) would be about a wash and I wouldn't get taxed on that income.  Am I crazy? I am meeting with a tax person tomorrow to discuss my plans.

As far as the capex, I was thinking I should really use the 18000 initial investment number for CoC because I definitely will me saving that money back with the cash flow. Does that make sense?

Jonathan Godes · Answer

Wapello is a very small rural town.  Your pool of renters are going to be VERY limited, especially if you are charging top dollar. I think that it would be optimistic to account for any appreciation or much rent increase at all. Not to knock Wapello, but it is a small and dying Iowa farming community whose population is in decline (per US census) and will get worse as the older folks die off and small family farms are consolidated.

I think you would be much better hedged to buy 30 minutes away in Muscatine or Burlington. Those cities have an economy of their own. If I were to buy in a community like Wapello, I would need MUCH better numbers that what you have. I would need to have at least the 2% rule as a starting point, AND get it at a significant discount to appraised value.

As for the property itself - you have some expenses coming up in the next few years. Other than it is starting to look pretty dated right now at 16 years old, your water heater is on borrowed time and you might be looking at a new roof in the next 5 years. Not big deals, but you just need to have a decent capex.

If you budget for capex and management (even if you are doing it yourself) and run the numbers, I think you would find that you are making around $35 a month (and that is IF things go well). To not run the equation with these two numbers is missing a big chunk of your exposure. What if you get disabled? What if you move away? That property management cost is going to be a real cost then. You need to plan and budget for it now. How many property managers are there in a rural town of 2,000 people? Is property management even possible without someone from Muscatine coming down and charging you 15% for the privilege?

Chris Pohlson · Answer

My high school music teacher, Merlin Schneider, was from Wapello, IA.  No joke.  Buying low income properties doesn't make you a slum lord.  Neglecting them does.

Nate T. · Answer

This deal is a no brainer if you can get the 30 year fixed at 4.5%. Stop over analyzing and buy it.

Chris Pohlson · Answer

Whatever you do, don't advertise at $800, $700, or $600.  Think $795, $695, $595.  Pricing psychology is real.

Matt Fisher · Answer

Kyle,

To me the COC return is low, but I try to focus on forcing appreciation through rehab and refinancing with little to no money down when I'm done.  That said, from a 'turnkey' perspective this sounds like it would probably work.Your concerns about renting and renters are justified.  It sounds like the house is in great shape, this may allow for better rents-I always try to get high rent off of a fresh rehab AND I'm happy to wait for great tenants and/or tenants that are likely to stay for a long time. BUT, I am in Des Moines, there is a huge pool of potential renters.  I also know your neighborhood well (I used to work near Letts/Cranston)... For Iowa, the area is economically depressed and you may have difficulty just renting it.. What town is it in?

Luckily, you will probably be close and can keep an eye on it. Strong lease agreements and excellent tenant screening can help minimize risk and since you will likely be close, you can keep an eye on it. It's ok to nag them!

Chris Pohlson · Answer

Make your tenant responsible for snow and grass.  You might be right about taxes.  Check with your CPA.

Matt Fisher · Answer

Thomas S. adds a good point-modifying it to make it a duplex would be a great idea.  The benefit of working in rural Iowa is that there are no rules and rental code!  I would seriously consider this, if possible.  I would kick back that if this is where you are comfortable and you can keep an eye on it a SFR is a great idea.  What does he know about your situation?

Nate is right-the time is now and it's a new property.  If push comes to shove and a year from now you hate being a landlord you can sell it fast.

Jake Samo · Answer

@Jonathan Godes is a good mix of people with Lenox ties or surrounding community ties and people with no ties to Lenox. For a small town we are fortunate to have pretty good industry footprint. Most of the jobs are ag related however- we have a John Deere dealership, Dalton Ag which manufactures other ag products, Michael Foods which is a egg factory, Taygold cooperative, Precision- makes pulley's and idlers for things such as wind turbines, etc. Those businesses employ a good portion of the community. However, the people moving to the community without ties are teachers (we had a bunch retire these last few years), an attorney, medical professional, mechanic, manager of assisted living facility, restaurant owner, carpenter, etc. on top of those other professions. Most of them aren't long term tenants as you mentioned, but with the small inventory in quality rental options it seems like we have had a lot of interest in our rental home. I understand it may be a unique situation with our community but I wanted to share with the OP as well. Sorry to take away from the original question in this thread.

First time investor. Is this a good deal?

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