Is this a good deal #2?

Question

Ok, so thanks to Bigger Pockets I was able to properly analyze my last potential deal and walk away from it and very glad and grateful for all the advice I was given.  I am back and hoping to get some more advice on another potential deal.

This property is in a class C area.  The community has an HOA, although it doesn't look very involved in the neighborhood.  The neighboring homes are kept up, not a war zone, but I wouldn't feel comfortable going to the house alone to do any maintenance, etc.  I would send my husband =)

Asking price: $94,900.  Offered 90K, counter offered by the seller at 93K, we countered at 92K and they accepted.  It's move in ready, needs maybe about $1,000 cosmetic changes if we decided to do that.  The rent in the area is around $950.  So after mortgage ($400), taxes ($122), ins ($40), HOA ($22), the profit is $366 not counting vacancy/repairs.

I have analyzed so many deals and looked at around 60 homes in the last 2 months and it seems that in central florida, at least, the good deals are going to cash buyers as my other offers weren't accepted even after offering $10 above asking price.  Perhaps due to conventional loans and too much repair on the house, etc.

Should I keep looking or does this seem like a decent deal?

Thank you in advance for your advice/thoughts!

Joe Villeneuve · Answer

I have a couple of questions:

1 - You mentioned a loan payment.  Can you explain?  How much and what are the terms?

2 - Did  you put any of your own cash into this deal?

3 - My concern isn't "sending your husband in"...it's that you don't have a provision for a Property Manager...who would save your husband the trip.  The 10% you'd pay for the PM would put your NCF around $270/month...which for me is too low, but this is your property.

Depending on how much of your own cash is "trapped" in the deal still, this looks like a good one.  Like I said though, I'd need to know more about how much cash you used and more about the financing in place.

Sheena Varghese · Answer

@Larry  P. You are so right, I know some investors wouldn't have a problem with it but not being comfortable to go into a home you own won't work for me.  I decided to forgo it.  Thank you for your input.

Andrew Davis · Answer

Hey @Sheena Varghese, first of all, way to take action and go see lots of properties.  At the price point you're looking at, competing with cash buyers is just apart of the game.

I use the 50% rule to very quickly evaluate how well a property is going to cash flow, if at all.

You are right on the line here.

Rent $950 x 50% (Prop Management, Taxes, Insurance, and capex: vacancies and repairs).

$475 after expenses - $400 for debt service = $75 monthly cash flow.

Not amazing, but you're also not losing money which is Warren Buffets #1 (and #2) rule of investing.

I imagine you're putting 20% down, so, with closing costs, and cosmetic fixes, you'll have around $22,000 cash into the deal.

$22,000 / $900 ($75 a month cash flow x 12) = 4% cash on cash return.

I would personally shoot for closer to 10%, especially in a C neighborhood.  I would probably only do this deal if there were a lot of equity in it and I felt that the neighborhood had some solid appreciation potential.

Just my thoughts.

Eddie Werner · Answer

If you don't feel safe I would not buy there.  If you add in vacancy/repairs/capex you would barely cash flow at all.  If you are having a hard time finding deals I would expand your search area to a 1-2 hour radius.

John Kent · Answer

@Sheena Varghese I use an excel spreadsheet and just plug in my numbers. The spreadsheet calculates a CAP (Capitalization Rate) rate and a IRR (Internal Rate of Return). If I have a double digit CAP rate then it is a good deal in my opinion.

The Bigger Pockets files section has a rental evaluation spreadsheet. You might also want to try Rental Evaluator Lite which is free but much more detailed.

I make my offers in increments of $500. But that could be because I am an agent and my real estate math brain counts in increments of $15000,$15900,$16000,$16500,16900.

Always evaluate your rentals as if you are hiring a property manager to handle the day to day operations of your property. This will give you the option to hire a third party should you decide to stop paying yourself to manage the property.

Larry P. · Answer

My concern would be if you don't feel comfortable going to the house alone is this going to also severely impact the number of qualified rental applicants you would get for this property?  Kind of like the old "location, location. location" saying.  Additionally, further down the road will this neighborhood decline making it even more difficult to find qualified tenants or making it difficult to sell?  If it were me I would wait until I could find something in a more established neighborhood more conducive to obtaining qualified applicants.

Sheena Varghese · Answer

@John Kent@Joe Villeneuve@Andrew Davis

- Thank you all for your insight.  You all were right, this was not a good deal so I decided to not go through with it.  I thought finding for your first property was going to happen right away so I was a bit discouraged by the 2 month mark without buying one.  But after reading some other posts, I guess it's not that long.  I will keep looking...thanks again!