Advice Wanted...Good Deal or Not?

[Julie Taylor]

I’m working the numbers on what could be my first deal. Any advice or words of wisdom??

This will be a buy and hold
REO - listed at 40k
I want to make a cash deal to get a better price - Any thoughts on what to offer? 30, 32, 35, 37??
Repairs Needed - 15-19K
This is a conservative estimate – It does need HVAC, we may need to upgrade electrical system (Al wiring - House built in 70's) – I will have inspection to confirm.

After repair value - 95-100K
Tax value: 99K (Rehab home in the same street is on market for 110 - It's a little bigger)
Rent: 700
Taxes: 1000
Insurance: 500
Not a great cash cow after PITI, vacancy, maintenance, but seems like a good opportunity to build some equity.

Was hoping to mortgage it and get my cash back to go again, but I can't seem to find anyone that will work with me without 6 months seasoning.

Thanks so much for your input.

[J Scott]

Since you're new here, let me first explain that around here we often talk about "The 50% Rule"...

This rule basically states that on-average, across all rentals in the country, all expenses (including operating expenses, vacancy, and capital costs) will tend to come in somewhere close to 50% of the total income on the property. So, a rental that generates $1000 in monthly income might expect to have about $500 in monthly expenses, including taxes, insurance, vacancy, maintenance, capital expenditures, property management, overhead costs, legal expenses, etc.


If you use the 50% rule here (and in my opinion, it's a good first approximation), then with $700 in monthly rent, you can assume your NOI is $350/month.

If you assume a 30-year fixed mortgage at 7% with 100% LTV (i.e., no downpayment), this would be a break-even deal at about $52,600 all-in.

If you want to make $100/month in cash flow from the property (pretty typical in terms of minimum cash-flow that most investors want to see), then you have $250/month from your NOI to devote to debt service, and you could afford to spend about $37,500 all-in.

So, with $19K in repairs needed, you can afford to spend about $33,600 on the purchase if you want to break-even (not that I would recommend it), or about $18,500 on the purchase if you want to earn $100/month in cash flow.

Also, I would make sure that your rehab estimate is accurate. If you're going to replace the HVAC system and rewire the house, you're probably already looking at $10K in expenses. Add in new paint and carpet, and you're probably at about $13-15K. And if this house needs HVAC and new wiring, what about plumbing, roof, cabinets, doors, etc? Just something to think about...