How have I evaluated this turn-key deal wrong? St. Charles, MO

Question

In the spirit of the latest BP podcast, I am curious as to how I evaluated this deal incorrectly. Find it entertaining the description lists it as a great investment property yet the numbers don't add up (8 Valley Rd, Saint Charles, MO 63303 - MLS#18003358). Here was my thought process on the different categories with a screenshot of the summary below:

Property Taxes: Last property taxes on Zillow was before this unit was renovated when it sold for half of what it is listed for now, so doubled property taxes.

Purchase Price: Listed at $155,000 and has been on the market for a while. Knocked off $5,000 and also would plan to have the seller cover all closing costs.

Repair Value: None, as this is a recently renovated property. Seems that one can find a better deal when the property does indeed need renovation. Also an area my estimation skills need to be critiqued.

Loan Details: Pre-qualified for a $150,000 30 year conventional loan with 3% down, 5% interest rate, $95 PMI, estimated $100 insurance. Could also do an FHA loan with similar terms and use a 203k for renovations but would need to live in for a year which I am not opposed to, would also need to refinance after 20% paid down to get rid of PMI on FHA loan.

Monthly Rent: Simply compared to listings on Zillow which average $750/month. Took it down to $700 a month for some breathing room.

Fixed-Landlord Paid Expenses: Did my best to estimate through Google can see in the screenshot below. Would plan on having tenants pay electricity.

Variable-Landlord Paid Expenses: Did my best to estimate based on BP articles and research. Vacancy - 8%, Repairs and Mait - 10%, Capital Expenditures - 8%, Mangement Fees - 10%

Future Assumptions: Did not assume any appreciation over expenses, would be a nice plus but want the deal to be able to stand on its own without appreciation.

Thanks!

Grant Hosticka

Jay Hinrichs · Answer

are you quoting a owner occ loan not an investor loan I have not heard of any investor loans with 3% down.

Kristen Beahm · Answer

Hey Grant!

I would certainly rely on a real estate agent to pull true comparable rentals in the area (as opposed to any kind of "Zestimate") to know what your projected rents might be. After a while, you'll be able to have a ballpark based on area, number of bedrooms, etc. just from analyzing so many!

Something I learned from my first investment property (also owner occupied in St. Charles with 3.5% down and then moved out and now rent it - just like your plan), is that the numbers might not be beautiful - it can be tough to accomplish with such a low down payment. I, however, have no regrets about purchasing this home, as it got me in the game, and it actually cash flows perfectly well, for my needs. Everyone is a bit different in this space :)

Lastly, it can be a little tougher to find a tenant this time of year (now that school has already started). If you move forward with purchasing a rental property this year, I would try and have someone sign a lease that gets you closer to spring expiration (i.e. 18 month lease) so that when the lease expires you'll be positioned at a higher demand time of year.

Happy analyzing, and best of luck finding a deal!

Kristen Paquette | Realtor ® | Worth Clark Realty

Jay Hinrichs · Answer

seems to me in that area most do it with rentals.. or MF  or other income producing properties.. OR many of those I know have done really well owning any variety of business's  in our market bigger sub contractors will do far better than real estate investors less risk more money..  there are all sorts of business's one can own to create long term wealth other than real estate.

Sam B. · Answer

Even if it is an occ loan, it's not going to be 3% since it's a duplex. It'll be 15%. For non occ on a duplex, 25%. Only option for higher LTV is FHA (occ) at 3.5%.

https://www.fanniemae.com/content/eligibility_info...

I can't tell you how many times I've gone through 3 weeks of the qualification process only to have a lender change the rules at the last minute because they didn't know the Fannie Mae guidelines.

And all that aside this does not look like a good deal to me at all. You're hitting the 1% rule on a multi in St Louis of all places. Not even close. I buy duplexes in Indy with similar numbers for 40-80K and I only buy them in areas that are virtually guaranteed to revitalize/appreciate.

Sam Hickey · Answer

Hello sir,

couple thoughts for you...

1. I am a Mortgage Loan officer in Missouri,   To second Jay's comment,  Investment Property loan would require 20% down ( sometimes 15%).  Primary Occupancy does have 3%, 3.5%, 5% options as well as MHDC Grant Program Loan in Missouri allowing for 0% out of pocket essentially.  There is also USDA Loans for primary occupancy that are 0 down in certain eligible areas.

2. Also,  The fact that the sale price double from last year, does not necessarily mean that the taxes will double.  Although assuming some increase is a good idea,  I would be shocked if the taxes increased from 1020 to 2040.  A better way to find taxes would be to pull taxes from other comps that reflect post rehabbed value.  probably 1100-1300 or something like that.

3.  Missouri and Zillow do not get along and Zillow is notoriously wrong on est. values as well as other info.  I tend to pull info from Realtor.com for more accurate info..  Basically Zillow doesn't pull real data from Missouri MLS to support its Zestimates.  Not true for all states but some politics and such got in the way.

Im new to investing but can speak to the above issue.. hope it helps a little.

Tyler Jahnke · Answer

@Grant Hosticka - Looks like you're calculating things pretty correctly. My first impression: this is not a good deal. First of all, it doesn't even meet the 1% rule (rents = 1% of the All-In price). You can still find 1%+ properties out there.

On to your numbers: I'll say, some people only calculate 5% for vacancy (opposed to your 8%), and your 18% for repairs/maintenance/capx might be a little high (but it all comes down to what you're comfortable with).

And remember, everything adds up. You're spending $90 a month on water, sewer, garbage. Try to find a place where tenant pays utilities.

I would not personally buy this property at $150k. But, the whole exercise now becomes: at what list price does this property make sense? $130k? $135k? $120k?

Then make an offer if you still like it.

-Tyler

Jay Hinrichs · Answer

OK got it house hack as it were..  that's a good strategy..

Grant H. · Answer

@Jay Hinrichs Really enjoyed the episode! Ole real estate junkie sums it up pretty well. Timber story was my favorite, successfully taking advantage of a niche you found. Also enjoy sports, fishing, and flying.

I am a recent graduate and work full time as a drone pilot for a utility company (enjoyed your TFR reference), have cash in the bank and no debt. Right now I have a high risk-tolerance and little to no commitments. Should real estate be my focus for building long-term wealth?

If so, where should I focus my education efforts? A specific niche or more general knowledge? After listening it seems my focus should be more location-based then anything.

Thanks

Jay Hinrichs · Answer

Just an ole real estate junkie..

How have I evaluated this turn-key deal wrong? St. Charles, MO

Most Popular Reply