Buying first SFH Rental Property

[Chris D.]

Hello BiggerPockets!

I have started searching around BiggerPockets the last few months, listening to the podcasts etc and would love for the knowledgeable folks here to review my first potential rental.

It is a 665 Sq ft SFH, 2 bedroom 1 bath with brand new roof and new furnace.

• Market Value $60,000.
• Rent would be $700 per month and can be filled in days (hot rental market).
• I have financing approved through a local bank with 15% down and $2000 fees required at closing @ a 4.75% rate on a 30 year.
• Taxes $1301 annually
• Insurance quote was $400

The property isn't on the market yet as it's being sold by a Realtor and he's giving other Realtors in his brokerage first shot at selling it before going onto the market.

My Realtor, that I trust, suggests that properties with 8% Cap rate and up go in days for full asking price in our market. I'd like to offer less than asking price, but honestly feel like negotiations will end close to the $60k.

I'm showing a 9.6% Cap Rate roughly with $500 per month maintenance. Cash on Cash return of 27%.

Running the numbers it seems like a good deal, what do you think?

[Simon Campbell]

My figures on your cash flow do not show that the property is a good investment option. 

First, let's apply the 50% rule to a monthly income of $700 and a mortgage payment of $308.54 (including PMI). You are showing monthly cash in pocket of only $41. Most investors require $100 per unit.

Now, let's use your numbers (specifically $1,301 taxes, $400 insurance - which seems about 50% low). I just can't see $500 per month on a house that needs no repairs. Typically you should allocate 10% of the gross income for repairs and 5 - 10% for capital repairs (such as carpet, roof, HVAC - any big ticket items). Using those numbers, you only have a $75 a month profit. 

You would need a purchase price of no more than $55,000 to make this profitable in my opinion.