Creating a Renting Profile for Investors to Raise Value

[Paul Woodburn]

Hello, I am a new real estate investor recently out of college. I have been searching for a while now for a good fix and flip property that has a high enough margin where I am comfortable committing my limited capital and time to. I have found that in the current market (Maryland, DC, VA) areas many home buyers are going in well above asking. This escalates my perceived risk as well because this trend is not sustainable and I am hesitant to change how I evaluate a properties value just because others are buying them at higher prices (going back to price is what you pay value, is what you get...). The housing market is a whole other discussion. I have stumbled across a weird niche market that has sparked my interest and wanted to hear feedback and comments.

There is a local area near me that has a strong job market and average population (relative to surrounding areas), but the home prices are selling at a de-valued figure. I did some quick research and figured I could purchase a 2-3 br, 1-2 bath home for around 60k in rent ready condition and turn around and rent it for a minimum of $1000 up to $1500 monthly, which would on average pay for the investment of the home in about 5 years barring any major repairs or set backs. (The property taxes are practically negligible at such a low evaluation). IMO any rental real estate investor who owns and operates rentals would jump at this kind of ROI.

The main reason I want to flip homes now instead of beginning to build a rental portfolio is to raise capital faster and accelerate my business and then diversify as it grows. My question is as a rental income investor what kind of metrics would you be looking for from a sale to show you that it is a good investment for you. My idea is to buy one of these properties and do curb appeal and lipstick renovations quickly and get renters in the unit. Then I want to put the property up for sale at a higher price and flip the property based on the rental income generation. 

I listened to a podcast (maybe bigger pockets or another im not sure) that said this kind of increasing the value in single family homes is not a good business practice and it is only applicable in commercial real estate, but I want to think by lipsticking and setting up a renter and income from a cheaper property in a strong location would be like tossing a softball in to an investor looking to invest in rental properties. 

Any and all feed back is appreciated. Not only I am looking for feasability feedback, but ideas on what data to present on the back end as well as how to present it and advertise it to the right people. Thanks in advance for your thoughts, Paul

[Kyle Johnston]

Hi Paul,

Welcome to BP! I'm relatively new and have a very similar strategy in mind as you do, flip homes for capital and experience, and eventually build a rental portfolio. I haven't done any deals yet, but I've done a lot of research and thinking about what would make a good rental, so hopefully I can help at least a little bit. The main problem with trying to flip to an investor, is that they will still need a discount from market value to make it a good deal for them. 

A good rental property investor is most likely more concerned with cash flow than appreciation, so I did some (very rough) calculations using the rental property calculator on here based on what you provided. If you buy at 60k with a couple thousand dollars in closing costs, put 10k in (just a hypothetical guess without knowing anything about the property, but it would have to be VERY light repairs to be much below this from what I've seen) You're in it for about 72-74k before your carrying costs. At a purchase price of 80k, renting for 1250 a month and including some pretty standard assumptions as far as expenses, this property would make the end investor monthly cash flow of about $140. That's not a bad deal depending on who you talk to, but I wouldn't call it a home run. Although, that only nets you 6-8k minus your carrying costs which in my opinion would be a pretty slim margin for error. It turns into not such a great deal for the investor even raising the purchase price by 5000.

Again, I don't know any specific numbers about the area or your deal, but based on what you said you're trying to do, this is at least how you need to think about it. Hope this helps and I sent you a connection request so I'd be happy to talk more since we're in pretty similar situations!