First Deal Potential, Please Help Me Analyze!

[Steven Leigh]

I started investigating this deal as a learning exercise, but now I'm actually considering it as my first deal. Please give me some help in analyzing it.

3 bd/1 ba in a suburb of Dayton, OH Probably a B property in a pretty quiet, family-friendly neighborhood once renovated.

It sat abandoned for a few years, was a rental before that, and was a bit trashed. Investor bought it in foreclosure for about $33,000, but had too many houses close at once and doesn't have time to rehab it. They put it up for sale for $55,000 but if it doesn't sell, they will eventually rehab and turn it into a rental. They will do owner financing.

One estimate for repairs is about 12k to 15k, but I'm figuring about 20k to be safe. I can do most of it myself, but may need to hire out a little too. I can list out the types of repairs later, but for now let's assume $20k is a safe estimate. (Obviously I will get serious estimates before going forward.) I think I can borrow the repair costs from family or a local lender.

Other homes in the area have gone for about $90-100k recently.

So here are the options I'm considering. Please weigh in on both if you have time.

A: Renovate to selling quality for 20k (maybe less) and put it up for sale with a realtor. Assuming it sells for $90k, what other costs are involved, such as closing costs, taxes, etc. that I might not be factoring in? Do you think there is enough margin to make money?

B: Renovate as a rental, maybe I can do it for $15k with good materials, but not high end. This will help the margin, but obviously I will have to pay the payment for the $55k, plus pay back the repair costs over time. I think it would rent for $800-900 a month. How would you calculate whether this would work as a rental? Please be as detailed as possible. I'm very new to this.

Thank you greatly in advance for your time and attention.

[Mike H.]

To me, here is what I would look at when determining if its a deal or not.

re: As a Rental.
How much am I putting into the deal and what kind of monthly profit am I getting.

Example:
55k purchase 15k rehab. I"m all in at 70k on a house worth 95k? You could do a cash out refi in 6 mos to a year and pull all your money back out. So your real out of pocket is going to be zero. 

The key question though to know if its a good deal as a rental. Knowing that, that means you have a loan at 70k (30 yr fixed at 4.5%) puts you at about $350/mo and a principal paydown of just under $100.  Insurance will run you about $50/mo assuming no flood plain and nothing crazy.

So now you're at $400/mo with rent of $800 to $900 and no money into the deal. But you need to know the taxes to figure out the rest of the question. Are taxes 200/mo? $400/mo? There's a big difference.

Lets say they are $200/mo. That puts your PITI at 600/mo which puts your GROSS rental income (rent minus PITI) at $200 to 300/mo. That seems a bit tight to me. I would want more.

I tend to figure 200 to 225/mo for vacancy, collections, repairs and capex.  At least for my typical deals - 3/2/'s, 1500 sq ft, built between 1970 and 1990.  

So if your gross profit is 200 to 300/mo then your net profit is 0 to 100 or -25 to 75/mo. Thats not good.

But that doesn't mean you can't take it down. Don't forget, you're getting principal paydown of $100/mo plus appreciation. If you figure 3% a year, thats another 3k a year or 250/mo? So are you breaking even or are you really making 350/mo. You're adding 350/mo to your net worth......

And don't forget, your mortgage payment will stay the same over 30 years. Your rents will go UP. Your principal paydown will go up as well.

So lets say in 10 years your rents go from 900 to 1150 ($25/mo is reasonable). your principal paydown is now 150/mo. And lets say your taxes go up 100/mo.

Rent 1150 MINUS PITI (350+50+300taxes). Now your gross profit is 450/mo. So your net is likely 225 to 250/mo. And your principal paydown is 150/mo. And your appreciation (assuming 3% for 10 years and a new base of 135k?) is 4k a year or 350/mo. Now what is your profit?

250 net rental income

150 principal paydown

350 appreciation

750/mo is what is now being added to your net worth.

So when you factor in whether its a deal as a rental, those are the things I'm looking at. What is it making me today? And what is it going to make me in 10 years? In 20 years when its paid off. Real estate is a real neat wealth building vehicle if you can hold it long term.