is it a green light or red flag?

Question

I'm looking at a few properties for my first investment..which I will be using bank financing for the mortgage when i decide on the right one... I've ran the analysis and they all look good with CAP rate a Cash on Cash return, but obviously I'm scared.. I live in Fort Lauderdale, FL and any property has a high price.  Is a 3br single family too big to start?  Or if the numbers make sense does it not matter?

Ebony Calloway · Answer

With that many people not in one family there may be issues with it being considered as a boarding house and only being rented out by the week may push it into short-term like vacation rentals which is another situation entirely. Just like a couple people mentioned before from that 1500 repairs, Capex(roof, water heater, HVAC, etc.), utilities, and management once you move out will need to be subtracted.

Ehab Shoukry · Answer

Hi @Angela Marie Federico! Just by reading your post it sounds like you need to learn a little more before you pull the trigger.  As others have mentioned, you are discussing cap rate for a single family home when that should not be the measure to determine whether it's a good deal or not.  You also need to make sure you understand all of the expenses that need to be considered along with the rental comps because those are the important factors needed to determine whether something is a good investment or not.

Lastly, you can minimize your risk if you learn how to buy with no money out of pocket, put in a solid rehab and then refinance to cash out any money you may have potentially in the deal.  At the end of the day, if you do not have any money invested, then you have very little risk and infinite ROI.  Good luck!

Kevin Koffman · Answer

“If you can pull it off... then go for it”. Exactly right!

The investment is not risky, the risk is all on the investor, Especially in this case. People buy 4 bedroom houses in FTL all the time and have no problem. The question is, how will it be for you?Do you have experience in transitional housing? Have you collected rent from people you have lived with before?Sounds like there will be plenty of people issues, compared to property issues.   If your comfortable with the process of dealing with that many people and you can collect the money and deal with it all, then go for it. I just spent 3 to 4 days turning over a property, it was a lot of work. Worth it? yes. Because my last tenant was in there for 10 years and paid rent on time every month and never complained.  But, You are in an entirely different, high effort situation. Make sure the numbers you have on paper are worth the effort you will be putting in.  It sounds more like a small business than a passive investment.  Just think of the accounting alone.  You should demand a Much, much higher return than a passive investment for the higher effort required to pull it off. I would not recommend what you describe for a first investment. Maybe a few, 2 or 3 roommates, but not 10 random people in one house. But that’s just me. Hey, If the return is high enough and your willing to do the work, go for it.

Nicolas Biangel · Answer

@Angela Marie Federico If the numbers work and you can pull it off, then go for it. I’m in FTL as well.  Make sure the area merits the rent you’re calculating

Angela Marie Federico · Answer

Ok, This is going to be long and I don't know if ill explain it right but here goes nothing... So the target market for my strategy is transitional housing so essentially the home would be set up as each room has 2 or 3 people as roommates depending on the size of the rooms and pay a weekly rent.  I will reside at the property as to manage everyone and collect rent.  Everyone would pay a 150 deposit which is nonrefundable, and weekly rent is 180.  So I'm going to calculate all of these numbers using that format. In a 4br house lets say 10 people at full occupancy.  I said 3br before I meant 4 sorry about that

10x180x4=7200

minus vacancy (which can be higher than just 5%) so say 35% to be conservative = 2520

=4680

minus mortgage, tax, ins (about 2300)

=2380 minus utilities =1500 (niaf)

asking price are all around the same amount within 2-3 thousand .. looking at 500k, 20k down loan amount 480... even with my math there is still profit but i feel like that's a big purchase for a first timer... let me know guys

Kevin Koffman · Answer

Give us an example of the best 1 or 2 properties you are considering. So we can see the cap rate, cash on cash, and purchase price, etc.

Also, you could look at metrics outside the property itself. Such as, your cash reserve after purchase, how long / how easily could you afford the property without a tenant. The amount you’re using for upcoming repairs / cap-ex. Etc. Then we could help you analyze your risk level.

Stone Saathoff · Answer

Bedroom count isn't much of a determining factor for whether or not a property is a good deal. That being said, a 3 bed property does tend to be the sweet spot in most areas. It's well known that a 3 bed 2 bath property is the easiest to rent or re-sell most places. I work with a lot of clients in San Antonio who do 3 bed + rentals and you're correct, if the numbers make sense it does not matter.

Evan Polaski · Answer

@Angela Marie Federico cap rate is pretty meaningless for a single family home.  Your cash on cash return is generally your most important number, and your overall monthly cash flow.

That being said, my first 5 investment properties were 3 bed, 1 bath single family houses.  To me this was the sweet spot, since most single family home renters are families with 1 or 2 kids.  And the rent to purchase price ratio was most favorable at this point.  When I looked at 4 beds, the purchase prices jumped faster than the rents, so the return went down.

My caution to you is to make sure you are comparing apples to apples.  You will have your monthly rent as income, then principle, interest, taxes and insurance; reserves for repairs, capital expenses and vacancy; and even if you plan to self manage, you should take into account management fees and leasing commissions.  If accounted correctly (which most new investors under reserve), you will have a true cash flow that will cover itself and you won't ever be out of pocket additional cash, similar to a stock investment or syndication deal.

is it a green light or red flag?

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