Good First Buy and Hold Deal?

Question

I am a roofing contractor, so I'm often giving estimates on properties that are about to be sold. Today I looked at a rental property in the Greenville area that was badly in need of a roof. The owner currently rents the home at $795 and is trying to make the decision of whether or not he wants to roof the house before he sells or try and sell it as is.

I was in the home, and I was surprised to see that it apparently needs very little work outside of the roof and maybe some Kilz where there is a minor leak. The owner said he is going to list it at 55k if he sells it as is. It's on a corner lot, and since I can do the roof ( which will cost me about $2,800 ) I'm thinking it may be a good buy.

I've always heard the "one percent rule", but I've also heard that you make your money going in. The house has a tax assessed value of 72k according to the county. I am eager to do my first deal, but I also don't want to jump in too quickly.

What do you guys think? Does this sound like a god deal? I am planning to finance it through the bank I have my business account with on a 15-year fixed rate loan with a $10,000 downpayment if I do the deal.

I am open to any thoughts or feedback.

Thanks

Sonia Roberts · Answer

True about negotiating the price, especially if that price was with a new roof and the property is not getting one.  Worth a try anyway

Shera Gregory · Answer

It sounds like it has the possibility to be a good buy and hold. For the value it's best to use comps, not tax assessments (although that's not a bad data point to have).

To analyze cash flow, ROI, etc I started with the spreadsheet that J. Scott put together to evaluate buy & hold over time and tweaked it to allow for a 15 year loan.  It's in the File Place section of BP at:

Buy & Hold Evaluation

One caution on this spreadsheet .. you can develop a deal "on paper" that may not exist in reality. I would so love to find my $25k purchase + $10k rehab that rents for $900 per month with 2% vacancy.

There is no separate capital expenditure row so my suggestion is to include enough money in the Maintenance section on an annual basis to equal at least about $1000 per year for long-term fixes and another $300 to $500 for "normal" maintenance.  It seems like every five years or so you will run into something that's going to cost about $5k to fix. That will eat up $125 of your planned cash flow right there.

And have a conversation with the owner to try to get the price down from where he is right now.  I have certainly over-paid for a property because it seemed like a good deal .. but maybe I could have turned it into a great deal.