What do I need to look for in this deal?

Question

I am new to REI and to the BP community. I have been looking for my 1st deal and I have an opportunity that I would like some advice on.

I found a townhouse in the town my son is going to college in. This is a 3/2 in a great part of town and very close to the university. Here is the deal.......

The townhouse had the pipes burst during the last cold spell here in Nashville. The pipes are repaired but the drywall and flooring still needs to be replace in the bottom floor. The owner has an estimate of $6300 for the repairs. The owner wants to deed the property to me for $10,000 plus the cost of the repairs. There are 2 mortgages on the property. The 1st for $110K and a 2nd for $19K. The current payment id $971 a month.

My son and 2 of his friends would be able to live in the house and we could get $600 a month from the roommates for a positive cash flow of $229......during the school year which would leave 3 months with no payments.

My question is what should I be looking at in this deal? Any advice will be much appreciated.

Blessings

Brent Coombs · Answer

I can't see your son thanking you for deeding him the apartment, unless you continue having the mortgage in your name (and you continue to pay all the expenses), until completely paid off. I calculate that you are basically paying retail anyway, for a property that is only going to show NEGATIVE cash flow for the foreseeable future. I see no upside, for you or your son. My 2c. Cheers...

Devan Mcclish · Answer

@Christopher Yates I looked at this property to purchase it myself. The first thing to be weary of is the HOA fees. HOA can become a real problem as a buy and hold investor if you plan on holding it for a period of time. For example, if one townhome needs a new roof in the subdivision, HOA will send you a bill to help pay for it (special assessment tax). This could take any cash flow you have right out from under you. I am an agent, I have looked at the comps I am seeing comps around 120-130k within that subdivision. There is an outlier at 150 but it is updated. From the pictures on this property, it is not updated. It is also a pretty good sized home at 2656 sqft. So consider the rehab costs associated with that in order to sell at your comp price of 150. The homeowner also just refinanced this property for 124k, meaning there is very little equity. That being said, if you renovated the property plus your 10k and you have to pay off the bank, you would have to come to the table with cash to close that deal. Also, I had checked the rents around that area on the MLS and they are going for 1000 a month. That is less than $100 a month in cash flow. Once your son moves out, you will be stuck paying a mortgage, and not a whole lot of room for any mistakes, which any landlord knows, there will be some problems. Be aware that at $83 a month in cash flow, the HOA just needs to assess one tax to you and it could wipe out your cash flow for several months.

Bob B. · Answer

You are a generous Dad. Let him manage it it and learn how the real world works. Get him a paint brush, a roller and a plunger and put him to work. That will be better than any class he will probably take. Good Luck.

Christopher Yates · Answer

Thx! That is exactly what we are going to do. He is in the middle of reading Rich Dad Poor Dad and is really pumped about this. I will be putting the up front $ in and he will be managing everything else (rent collection, making the payments, maintenance....etc.) and we will be doing the repair work together. This is going to be a legacy I plan to pass down to all my children!

Christopher Yates · Answer

Thx for your reply Bob. I think I might still do this deal. It is very close to the University and is in a very nice area. Comps in this area are going for about $160K. My plan is to rent this out while my son is in school and then deed it over to him as a graduation present to help him get started in REI at an early age.

Devan Mcclish · Answer

@Christopher Yates Good luck! Nashville is a tight market for good deals, but they are still out there

Christopher Yates · Answer

Tom, Thx for your input. My son has a place for the fall so I am not in a rush. The neighborhood I live in has an HOA and the quarterly dues keep going up. Very frustrating and one of the things that concerned me about this property. I'm going to keep looking for that deal to buy "right".

Christopher Yates · Answer

Thx Devan! I was hoping this would have been a 2 bird, 1 stone thing....... My 1st deal and a place for my son. I appreciate your input and I'll keep poking for that "good deal".

Tom Shepard · Answer

I own a condo near a university in another TN city. You won't have much vacancy issue, BUT those payments and that rent are problematic. Between taxes, insurance, and the HOA you will be feeding this cash eater every month above and beyond the rent even after your son graduates. I would keep looking, Nashville's expensive, but you can still find something, and you've got until August I presume?

Matt G. · Answer

Why wouldn't they stay there during the summer? The only time I went home for the whole summer was freshman year. The rest of college I stayed in the town and so did my friends and most people.Also, if it's in Nashville I'm sure you could do it as a vacation rental or find someone who would rent it for three months.