Would Y'all Do This Deal? Any advice would be appreciated.

Question

So, I'm looking to do my very first deal, with the goal of getting in the game and achieving cashflow.

Found a potential rental property and wanted some perspective on the potential of this.

Single family home, 3 bd 1 bth, 900 sq ft.

Built 1926, last remodeled in 1960.

Asking price is $80k, down from $90k after 6 plus months on the market.

Property tax is $1,200/yr.

Going rate for property management in the Treasure Valley is approximately 10% of rents.

This is located not far from a small college (1100 students) in a suburb that is rough in some spots but is in the beginning stages of revitalization with a population of 50k plus in it's section of the Boise metro area. Looking to BRRRR it, hopefully pulling out initial investment plus rehab, with some cash flow after. Potential renters would be small family or college kids.

What I'm looking at doing is getting a HELOC on my house, (due to insane market appreciation due to a large influx of people and a massive housing shortage I have 90K plus in equity) and potentially offering $60k and allocating $25k for rehab. Needs central A/C, possible new roof, and definite flooring, paint, and fence, etc. I figure it should appraise at $120k ARV, mortgage for $85k, pulling out initial investment and paying back HELOC, with approximately $160 or so cashflow each month.

So, factoring:

gross rent: $900/month

property taxes: $100/month

property management: $90/month (am going to manage myself, but want to budget for property management in case I want to turn over the job.)

CAPEX: $45/month (5%)

Vacancy: $45/month (5%)

Mortgage: $460 (assuming 5%, 30 year at $85k)

Cashflow: $160/month

What do y'all think? Is there anything I'm missing or suggestions y'all have for me? Thanks again to everyone for your time, knowledge, and help!

Kerryanne Henry · Answer

I agree with @Veronica Fletcher, do the BRRR calculator to make sure you have all your bases covered. I'm not familiar with your area, but if the house has been on the market for 6 months and no one has bought it cash... Im a little leery about the ARV being 125K. Use solid comps to run your numbers to reduce the likelihood of losing money on this deal. Good luck!

Dave Passey · Answer

@Jason Bohling Hey man, the numbers work if they work for you. If you listen to David Greene on the podcasts at all, you just basically nailed the numbers he goes for. ARV $120k Purchase Price $60k Repairs $25k Refinance for $85k Rent $900 Cash flow is nice, of course there are a few other factors, but it is not a terrible deal. I think the biggest thing you should look at is if your ARV is accurate. If you can’t refinance out, then it kind of wrecks your BRRRR method.

Jason Bohling · Answer

Thanks everyone for the sound advice, I learned long ago that trusting your gut is important but listening to the knowledgeable and experienced advice of others can be worth it’s weight in gold. After continuing to run the numbers and listening to both, I’m moving on from this location. Thanks again for your perspectives!

Veronica Fletcher · Answer

@Jason Bohling, have you analyzed this deal in the BRRRR calculator? It seems you are missing a few components of your analysis, and the BRRRR calculator will ensure that you have those covered. If you have run out of calculator uses, let me know and I can run the numbers for you.

Jason Bohling · Answer

Thank you both for your input. Getting that kind of a price cut is tough, I admit. The property is very rough looking (all the windows have sheets for curtains, falling apart fencing, “smile you’re on camera” signs, etc) so I can see why people aren’t wanting it. There has been INSANE market appreciation in the Treasure Valley due to a shortage of construction crews, severe inventory shortage, and massive influx of out of state cash buyers). One of my best friends has multiple rentals in this area and based on his rentals (a couple are pretty comparable comps-very rough idea, will definitely run more) $120k is realistic as is potentially $975/month rents. Also, another option is my wife and I are becoming empty-nesters this summer, and we could possibly rent out our 2195 sq ft current house in Eagle, move into this one enabling me to do a VA cash out refinance for the $85k (VA cash out refinance does 100% loan to value and no down or PMI), in which case it would only need to appraise at $85k. What do y’all think?I’m going to run the numbers again at a higher price point (actually going to run multiple financial scenarios to make sure it makes sense). Tom Shallcross, you’re right about the insurance (what I get for typing/thinking at 12:30 in the morning). Insurance would be roughly $40/month so cash flow amount would actually be about $120/month. In this market it’s customary for the tenants to pay all utilities, lawn care, and snow removal (it actually doesn’t snow a lot in this part of Idaho, so a half hour of elbow grease a couple times a winter is it).Thanks again for your time and input. I appreciate it.

Tom Shallcross · Answer

@Jason Bohling - I don't know the area at all. Buying 25% under and then having it appraise for 125k seems optimistic, but again I have no idea if it's possible or not in your area. I do want to call out you don't have property insurance in your calculation. Also, the usual, heat/snow removal/water/electric... but I assume that you assume renter would pay for all those. Just make sure that is inline with the market.

Aaron K. · Answer

You can try but a 25% price cut is probably not going to happen, and getting any property in ID for $60k that is worth having seems tough to do.