My first investment property questions

[Tim S]

I'm getting serious about purchasing my first investment property. I could use some advice/recommendations to help decide between 2 potential properties. Both are REO properties and I estimate both will need an additional $5k rehab.

Property #1 Town House built in 2006: $85k with 25% down payment. Loan value ~$64k. Estimated rent of $1200 with estimated positive monthly cash flow of +$300 (plus $262 towards equity each month).

Property #2 Condo built in 1987: $42k cash. Estimated rent of $800 with estimated positive monthly cash flow of +$450.

I appreciate your feedback.

[Nathan Emmert]

Look into the 50% rule on long term expenses, it will help you get a more realistic idea of what your cash flow should be.

You didn't mention HOA fees or taxes for either property. Those are variables that can vastly swing financials.

Beyond that, it's a simple CoC calculation. Lets assume your numbers are right. Property #1 you're going to be in $26,000 for $3,600 a year, 14% Cash on Cash return... not great, not terrible. If you pay closing costs outside of the loan, it will edge more towards terrible.

Property #2 you'll be $47k into for $5,400 for an 11% CoC... that's not really that good and only gets worse if you have to pay closing costs on top of the purchase price.

On a move in ready, 75% LTV leveraged property, you need rents to be 1.5% of purchase price to generate a 15% CoC return. Always have the seller pay your closing costs to help improve CoC. If the property needs work, you'll have to aim much higher than 1.5%.

Again, look into the 50% rule of thumb on long term expenses. It appears you're underestimating them above.