Need help analyzing a deal. go or no go

[Srinivas Chinnam]

Hello BP members,

I've been reading BP posts, blogs and listening to podcasts. They are immensely helpful to get started on my REI journey. Thanks a lot to the whole community.

My current goal is to build a side income to $2000 per month in the next few years. I like my job and will continue with my job for the near future.

I found a very friendly Real estate agent on BP and working with him to find a SFH in Wayne city, Westland, Garden city or Dearborn heights in Michigan. I've read several posts and blogs on BP on how to analyze a deal.

I found a rehabbed house with new kitchen floor. vinyl windows, new furnace, new ac, new water heater, newer roof. I need help analyzing this, whether i should go or hold on this.

Here are my numbers:

House: $81,000(I wanted 80,000. We havent agreed on the price)

Option1:

Rent: $1100

Capex: 15%($165)

Vacancy: 6% ($66)

Taxes: $200(Wayne county taxes are pretty high relatively)

PM: 12% - $132 (8% monthly + one month full rent. lets say that we need to find a new tenant every two years)

Mortgage (30 years at 6%) : $385

Insurance : $60

$1100 - $1008 = $92

CoC: 5.52%

Option2:

Rent: $1100

Capex: 12%($132). I've decreased the capex because it is rehabbed with new stuff.

Vacancy: 6% ($66)

Taxes: $200(Wayne county taxes are pretty high relatively)

PM: 12% - $132 (8% monthly + one month full rent. lets say that we need to find a new tenant every two years)

Mortgage (30 years at 6%) : $385

Insurance : $60

$1100 - $975 = $125

CoC: 7.5%

Here is how I am thinking. I can get 1100 rent now(3 bedroom). I am not sure if I will get the same rent in 10 years when it is not going to be looking new. My Capex/repairs might increase. Even if I had to put my house at $1050 per month lease, my numbers crumble real bad. In this part of the state of michigan, there is no real appreciation as far I understand.

It is really hard to find deals though. I added myself to several wholesalers list but I dont find anything in the areas I am looking in.

Thanks,

Srinivas

[Laura Williams]

@Srinivas Chinnam One thing that never gets talked about on these forums is the high cost of turnover. You definitely need to factor in extra for whenever you have a tenant move out. It’s in the thousands depending on size of house and how perfect of a condition your local market expects the housing to be....If you’re going to get a tenant who is going to complain cause the paint isn’t perfect (which I’ve had and then my PM asking me if I’m willing to have the whole place professionally repainted again!!) or a tenant class who doesn’t care & is just happy with clean safe living. Usually the PMs never get to the turnovers until at least 2-3 weeks after the tenant moves out then it’s another week or 2 of them doing the actual work & cost $$$ & Repairs..replacing carpet etc. Then you almost never get an immediate tenant so another month or 2 of lost rent while your house is being shown for rent. Then you have to pay a leasing fee to the PM once you do get a tenant. Plus the whole time you’re carrying the utilities. So just something to be cautious of is planning how much it’s going to cost when your tenant moves out and you have to get the place re-rented again. If you’re in a market where the rents are going up every year then it’s really going to help you offset your turnover cost. Also smaller houses are much easier and cheaper than the monster big ones and if you live close by you can do a lot of the work yourself or with cheap labor which can help you save tons.