How to evaluate a deal - principal payback?

Question

Hi All,

I'm questioning my approach after several decades, old dogs they say ....

I want to evaluate the purchase of a SFR. I normally account for my overall cash flow as rent minus expenses, where expenses are mortgage payment (prin & interest), insurance, taxes plus a reserve for miscellaneous.

In looking at a property near Hillo ($250k 3/2) with 20% down. This leads to a property I can rent for maybe $1200 but my cash-flow is negative at -$152. However, if I account for the fact I'm paying down principal  $263/mo my net is really a positive $111.

I already have a couple rentals near Hillo and I manage them myself from CA with tenants that are long-term stable.

Which way is the correct way to analyze this? Principal or not?

P.S. HI requires resident RE Brokers to manage short-term vacation rentals owned out-of-state but long-term non-vacation rentals don't fall under this rule.

Thanks for your advice

Joe Villeneuve · Answer

Then I would be scooping up all those 150/month props I could. Too many REI fall victim to the emotional glamour properties and rationalize those as better...in spite of bad numbers.

It's all about the numers...with $$$ in front...and "+" in front of that.

Rationalization is the most expensive word in the REI dictionary.

John Hamilton · Answer

In order for a deal to be a good one requires a positive cash flow right off the bat. Maybe you can negotiate the purchase price, reassess your rehab costs and know your ARV, if any, that might help your numbers become better. Maybe not. It takes time to build equity, so don't even consider that until you reach the 5+ year mark.

I would move to the next deal, unless there is no next deal in the area you prefer to invest in (because of nice view, location, whatever). Maybe waiting is a good idea if that's the case.

One question; how do you manage your properties from CA?

Kevin Mizuno · Answer

Most people don't count principle when analyzing a deal.  I would look at it again as it doesn't sound like a good deal.  Hilo is a small community with not much upside appreciation.  That is just my opinion.  However, nobody knows the future.  Good luck.

Joe Villeneuve · Answer

You're rationalizing to convince yourself this deal works.

John Hamilton · Answer

I guess a deal is a deal. However, there are some areas I prefer not to invest. I suppose if I built up my network that I would find investors interested in those areas.

We have to be like the Borg, or Spock, when it comes to emotions and real estate investing. Or any investing, for that matter. And rationalization is a naughty word, too.

John Hamilton · Answer

That's a slim margin if there is rehab needed for those homes.

I figured as much. Just curious. It's nice to sit back and let professionals handle your business, huh? Just as long as it's a positive return, lol.

Next time you go to Hawaii, you have an extra spot for me in your luggage, lol. j/k

Joe Villeneuve · Answer

How can you not count principle? It's the only thing that's real in the deal

Brian Tremaine · Answer

Hi John,

You are correct, I think I can find a better deal and the price I was stating was list. Currently homes are going ~6% below list.

As far as managing our properties we have several handymen, and other services we use frequently for our vacation rental that a PM handles. We use those same services for the SFR. These are long-term rentals (i.e. UofH grad students in residence) so there is not much managing to do. We also vacation there 1 month a year when we check in on all properties.

Brian Tremaine · Answer

@Joe,

I think your probably right. I like the Hilo area and it's hard not to be swayed by properties that are so much less than San Jose :). I have seen other opportunities  there that can provide $150/mo with <$40k cash in. My objective is long-term buy & hold.

Devan, Thanks for your unbiased input. I would plan on a 30 year note and probably sell in 10-15 years. You are correct I should consider the worst case scenario. They always happen at the most inconvenient times.

Kevin, I already own two homes and a vacation rental in the Hilo area and like it very much. My wife & I stay there 1 month a year and plan to be there at least 4mo/year when I retire in ~5years at 70. The other islands, and even Kona on the Big Island, are too touristy for us. You are right, this has kept the appreciation modest but I also have a feeling a lot of main-landers are going to get tired of $1MM entry level homes and $3500/mo rents.

How to evaluate a deal - principal payback?

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