Does this deal make sense?

Question

Hi - I am new to evaluating deals so any feedback is appreciated:

My goal here is a buy and hold- seeking cash flow:

?Purchase Price $30,000

?Rehab – $35,500

?Closing cost $2,500

?Total investment $68,000

Monthly

Rental Income   $850

Expenses:

Property Management   $85

Property Taxes   $22

Insurance   $60

I am plugging it into the rental spreadsheet and with 8% vacancy loss plus $2,000 a year in additional repairs I come out with:

8% cash return on investment.

Is there a level of return I should be seeking if I am looking for primarily cash flow properties?

Thanks for your feedback.

David Beard · Answer

$35k to get it to a rent-ready state?  That sounds excessive.  Can you provide a rundown of the work.

10% is a common threshold many use for the net yield on a rental, of C+ to B- range.  Down to 8% for a solid B, up to 12% for C class.

That said, this is very very very area-dependent.  Many areas have poor net yields, even on C properties (west coast, northeast coastal).  I would think that Maine is not a terrific cash flow market, generally speaking, but probably has reasonable cash flow in certain submarkets.

If you want to invest locally, which is a great idea, sometimes you have to take what's available.  If you can obtain a 15% gross rent yield (8% net, as you compute), then that is very reasonable in many areas of the country, particularly as your property will be very nicely renovated.  If you finance it after the rehab (look up Delayed Financing Exception) at 5%, then you will increase your ROI to at least mid-teens and have cash to move on to the next project.

Account Closed · Answer

You are doing a lot of work and taking a lot of risk for a 8% return. I dont agree that you should take whatever deal you get if its good for your local market. Maybe your local market is not suited for this kind of investment. Look for other kinds of investments or other markets.

Mike D'Arrigo · Answer

I agree with Anish Tolia that you're taking on a lot of risk with a $35K rehab. The more extensive your rehab the higher the risk. 8% return is not a high enough return in my opinion to cover the risk unless there is significant equity based on your ARV. As others have said, it also depends on the property class. If this is a C class property, I would say it's not a good deal. If it's a B class with equity on the front end it could be a good deal.

Yang Xiao · Answer

David,
	
	What city are you in? If you invest in Indianapolis, you can get almost $1000 rent with that kind of investment. You may not have to do much rehab either.

Shawn Holsapple · Answer

@David O' Donnell is that tax amount correct?  It sounds low.

Aaron Montague · Answer

From a purely Rental point of view, I get slightly better numbers than you do.

I used 25% down against a loan total of $65,500 (purchase plus rehab rolled in)

How are you looking at the mortgage?

I get $850/month in revenue against the following expenses:

Mortgage Rate 5.00%

Length of Mortgage in years30

Monthly Mortgage payment $263.71

Taxes $22.00

Sewer and Water $-

Trash $- (Do the tenants deal with this on their own?)

Heat/Utilities $-

HOA $-

Cap Ex and Ops $170.00

Insurance $60.00

Mgmt Fee $85.00

Vacancy $68.00

Total Expenses $668.71

Cashflow/month $181.29

Cashflow/year $2,175.44

Cash on Cash Return 11.53%

Engelo Rumora · Answer

Thanks for your comment David.

I will be a bit bias and say Kansas City and Toledo because we work in those market lollol

Other markets that I consider as great value plays and where the numbers work well are: St Louis, Indianapolis, Columbus, Cleveland, Dayton, outskirts of Detroit.

We focus on properties below the $50,000 range.

Just my opinion.

Thanks.

David O. · Answer

@Engelo Rumora Where would you recommend looking for those deals?

Thanks

Engelo Rumora · Answer

@David O' Donnell

There are properties in the Midwest in very decent areas that you can be into for $50k max (purchase and rehab) and still get those rents.

Thanks

Robert Leonard · Answer

@David O' Donnell a couple key components missing in your equation: what is the ARV of the property?  With SFR, that's determined by sold comps with cashflow valuation only used as an alternative when no good comps exist.

How are you financing this deal?  Whether you are using all cash or leverage will determine your cash on cash return.  Cash on cash return is always higher when you use leverage.

Does this deal make sense?

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