Nervous about pulling the trigger on first house - feedback?

[Heather Ippolito]

OK its a SFH in a nice neighborhood in NC with mostly military families renting. House built in 1992.

Asking price $139k

Hopefully paying 127K in cash

Rental income $1300

Taxes $1100/yr

Prop management 10% of rent

Insurance $80/month

House is in good shape. May need roof replaced in the next 5- 10 years.

Any feedback on this? 

Thank you!

[Tom Mole]

@Heather Ippolito

This property probably would not meet my ROI requirements. Given $1300/mo and applying the 50% rule (since you didn't really account for all the operating expenses) gives only $7,800/yr. If you got it for $125k all cash, your return would be about 6 1/4%. If you have one month vacant per year, your return drops to 5.2%. Pretty thin. You'd do better to loan your money to a rehabber at 12% and forget the worries of being a landlord.

Now you could increase your percentage return by leveraging the property, however your debt service with eat into your cash flow. All in all, this would probably be too thin at this price point. What return on your investment do you want? 

You could work from your needs to determine whether a deal will work for you, instead of starting, as most of us do, from the seller's needs. Try this: I need to make X% ROI and $Y of cash flow each month for a deal to be good. Given the rents in the area, I should make $Z/yr. In order to do that I would have to pay no more than $C in cash and finance $F.

For example, I found a nice home in an area where military families would pay $1,300/mo. I want to make 8% or better on my investment and at least $400/mo in cash flow. We'll assume for this example the expenses come out to 50% of income, including vacancy. 

So, 

$1300/mo x 12 = $15600   (gross income/yr)

$15600 - $7600 (gross expenses/yr) = $7600/yr (NOI)

$7600 / 8% = $95,000 (all cash)

$400/mo x 12 = $4800 (cash flow/yr)

($7600 - $4800) / 12 = $233 (debt service/mo)

$53538 @ 3.5% for 30 yrs = $233/mo

$80462 (cash) + $53538 (credit) = $134000 (seller's best offer so far), which yields 9.45% cash on cash and $400/mo cash flow

Pretty cool, huh? I know it's a little complicated, but I squished it all into under a dozen lines. It leaves you with a better return on your money than an all cash offer and more of your hard earned dead presidents in your bank account looking for another deal.

What do you think? Clear as mud, right? Play with this a bit, tweak the numbers. It should start making sense after a fashion. If you have any questions, feel free to ask.