SFH Turnkey in Decatur, AL

[Satish Kumar Kommineni]

Hi Everyone,

This will be my first post about my first to be REI. I am in discussions to buy a SFH(B+/A- neighborhood) in Decatur, AL which is in advertised for Rent. All i was looking for ~1% return. On Long term, I want to be a passive investor to buy and hold 2 rentals/year for next 5 years.

Here are the stats of the property

Property price: 92000

Expected rent: 875

Loan details:

Conventional 30-year - 4.0% interest - 20% downpayment

All the experts who were in my stage in the past please give your feedback what you think about the deal.

Thanks

[Jeff Petsche]

@Satish Kumar Kommineni Everybody has different goals for what they want as a return on investment, so asking for advice is never a bad thing, but the responses you get might be based on the responders own investment strategy/criteria and not yours, so always take that into consideration.

For Example: Some investors might be okay with a 5% CAP RATE and 8% ROI, where others won't touch anything unless it's a 8% CAP RATE and 12%+ ROI.

With that said, I ran the numbers you provided through my software analyzer and here is what I came up with. (NOTE: I used the actual numbers you provided and I personally would have factored in 8% to 10% vacancy on deals I analyze. I'll show you the difference when changing the vacancy number. Also, your total operating expenses (including vacancy) came out to 37%. I like to use a minimum of 40% (includes 10% vacancy) and many investors use the 50/50 rule. I'd rather be conservative and if the deal still works, then I'm happier if my expenses are lower than analyzed)

Based on Numbers You Provided

CAP RATE: 7.2%

COC (Cash-on-Cash): 11.6%

Debt Coverage Ratio: 1.67

Return on Gross Equity: 13%

Based on 10% Vacancy and 40% Expense Estimate

CAP RATE: 5.7%

COC: 5%

Debt Coverage Ratio: 1.25

Return on Gross Equity: 5.6%

Based on 10% Vacancy and 30% Expense Estimate

CAP RATE: 6.8%

COC: 10.1%

Debt Coverage Ratio: 1.49

Return on Gross Equity: 11.3%

I was taught a quick offer calculation strategy where you look at NOI X 10 as the value price, and offer 10% under that number. Example: If NOI is calculated at $7,500/annual, I would offer $67,500 ($7,500 X 10=$75,000-10% ($7,500)=$67,500.

Based the above information and even using my conservative numbers, I would move forward with additional due diligence and see if there is an ADD VALUE play here that I might be missing. Could I raise my NOI through cutting expenses, raising rents to market rent (if they are under performing), can I negotiate a better deal with the PM company, etc.

Again, every REI takes a different approach, and this is just one way my partner and I are looking at deals.