Good First Property?

Question

Hello,
We are on the verge of buying our first Investment Property, but have been thinking about it for quite a while. I do have a mentor in my uncle that has been a Landlord for about 5 years with 10 units. My day job is in construction design/sales specializing in kitchens and baths, so I could get that at cost and have a good list of subs to use too.

We are in a town of about 10K people with a good employment situation compared to the national picture. The property we are looking at is a foreclosure and listed right now at 49K. It is assessed at 92K and was first list at 79K about 2 months ago. The last drop took it from 59K down to 49K. it seems this is about the discount that things seem to get snatched up at around here.

It is a 4 bedroom 1 1/2 bath bungalow in a great older neighborhood that is mostly filled with excellently maintained houses in the 130K - 170K price range. It is considered a very desirable area of town to live in let alone rent in.

I know it needs some minor interior stuff; carpet, paint, maybe cabinets, and 1 bath needs some drywall and mechanicals. The outside is mostly maintenance free. Nice sized lot too for a family.

I am going to look at it this afternoon with our towns 'foreclosure specialist' Realtor.

How I see the finances is this; buy at 47K, but in up to 18K in improvements for a total of 60K invested. Payments look to be around $378 @ 20 years @ 5.5% (our local banks going rate on SF rentals), taxes and insurance of about $216 for a total fixed cost of $594. I am fairly confident that we could rent this house for at least $850 per month. Figuring 1 month empty per year, that would be a total income of $9350 - fixed cost of $7128 = $2222 cash flow.

I am looking at this as a wealth builder for retirement not as a current profit maker.

What do you all think of it in general?

Thanks, Dan Dietz

Mark Forest · Answer

Hi Mark.  How have you been?  I would like to know why you think this is a better flip as this rent/flip decision always confounds me.  What went into your analysis?  Is it because he may not get the desired $100.00 per month?

Thank you for your help.

Daniel Dietz · Answer

Thanks for all the responses. We did go view the property and of course as luck would have it, it needs more work than we were led to believe from the listing agent. :roll:  I am trying to decide wether to pursue this one at a lower offer price of to look elsewhere for a better deal.

If we move any further on this one I am going to get some of my subs in to get some acurate cost on things and lower the offer accordingly. The agent said most of the investors in town who do the 'quick flips' are passing it by, and the rehabers are mildly interested but feel the price will go down yet.

As far as the values I did some more checking and it would likely be in the 90K range. The majority of the others in the area (a few square blocks) are in the 120K - 160K range. The agent said the only 2 that have sold that were NOT foreclosures went for around the assessed value. Even though it is a 4 bedroom and has lots of curb appeal from the outside, most of the others are larger, fancier, BIG years, bigger garages, etc....

I also need to do more education on the whole flipping side of things. Since I am mostly looking at this from a long term asset builder for retirement, it seemed at first glance that renting and having them paid for about retirement time would make sense.

My 'mentor', who went and looked with me, thought that our rental income estimates were very conservative and it would be a quick rental in that particular neighborhood.

I will up date when I have some more accurate rehab figures.

Thanks for the advice,

Dan Dietz

Mark Yuschak · Answer

If your comps truly are in the 130K - 170K range, then this property is much better served as a rehab flip than a rental, IMO.

Using the 50% rule, if the rent is $850 a month, that leaves $425 for your expenses (taxes, insurance, maintenance, repairs, vacancies, evictions, etc.).  The other $425 would cover your debt service and true cash flow.  Most investors like to see true cash flow of $100 per month.  That leaves $325 to cover your note.  Can you refinance it to get the payment down to $325 AND still get a decent return on your equity?

I still think this property would be a better flip than rental.

Dale Osborn · Answer

What advice does your mentor give you on this property? He should be the one answering your basic questions and acting as your investment guide. Get him involved on this one!

Steve Babiak · Answer

Check your math; 47K + 18K = 65K where I'm from :D

You need to establish the ARV (after repair value) from sold comparables, since that is how an appraisal will approach setting the value.  The numbers in your post that indicate value - 92K and 130K-170K are quite a bit apart, and very far from the asking price.  If things aren't being "snatched up" until offered at lower listing prices, then it is even more important to know the real value once it's fixed up.