Is this too good of a deal to pass up?

Question

I have been looking to purchase my first rental property and have kind of drug my feet a little, but mainly because the market where I live is overpriced for rentals on the MLS listing.

I was talking to a contractor about going to look at one, and he told me I should look at his first. He has been trying to offload them from a note.

This is 4 houses total for $200k. 3 of the 4 are not even 10 years old, and they where built to be rentals. Nice little 3 bed 2 bath and one 2 bed 1 bath all stacked down the same street. No fences to have to upkeep, a basic deck on the back of them, all concrete stained floors, wooden cabin looking walls so no Sheetrock or paint to be done. Metal roofs.

The 4th house is older. And his original plan with it was to tear it down one day and build a nicer home and sell it.

All 4 are rented with long term renters, who he has a relationship of dropping by and collecting rent from.

If you run the numbers the properties all make a cash flow of around a combined $500 a month. So not that great, but in the positive. Rent could go up, but at the risk of loosing tenants I am sure.

I have already been approved by the bank with 15% down but I am worried about diving in head first into 4 properties as a single mom.

I dont have a history of real estate or rentals, but I would really love to work towards financial freedom you all speak of so much.

The 4th home is old and it’s kind of scares me with the unknowns, all the tenants being there before worries me as well.

And advise on making the decision to jump ship or grab the properties up? I have really been doing my homework on rentals, and it’s just kind of scary and I have froze..

Wayne Brooks · Answer

@Roxanne McClain Yeah, I get that 3 of them are “low maintenance” but $300/year for repairs......no way.  And you had $0 for capex, in your numbers above. The problem with low rent properties, $500/mo, is the normal repair/capex percentages get skewed.....a single $600 water heater replacement would be 10% of your annual rent on one of these houses, as opposed to being 5% of annual rent on a $1000/mo rental.

I definitely agree with either not buying, or selling shortly after, the 4th older house.

The “1% rule” on these lower priced rentals is inherently skinny....more applicable to higher priced properties where better appreciation would be expected.

Braden Downs · Answer

@Roxanne McClain $500 for four SEPARATE houses seems low with the risk. Four different roofs, water heaters, tenants, and etc.

Could you hold out longer for a multiplex offering a similar, or even smaller cash flow, only to have your repairs, capex, and vacancy be smaller?

Also going from zero to four houses could be a big jump, just depends on you and your situation.

Good luck!

Jonathan Bombaci · Answer

What would the 4 houses be worth on the mls?

What type of rental were you looking for before? SF or Multi-family? Based on the description your basically buying 4 SF homes. Can you sell them separately or are they all on one deed?

Don’t buy them without doing a full inspection that may confirm some of the things you suspect about the older home. Ideally you’d buy the 4 for less than $200k and then sell off the one that worries you to get some of your money back. If you can’t sell them individually then ask yourself at what price is the deal too good to pass up, and see if the contractor would go for it.

Geordy Rostad · Answer

@Roxanne McClain

You should start by taking all of the numbers and plugging them into the Bigger Pockets rental calculator. Then share them back here and we will tell you what you may have missed and if it looks like a good deal or not.

Once you have analyzed enough numbers for enough deals, you will have the comfort level to pull the trigger. $500/mo is a fine cashflow on for a $200k property you can snag for 15% down.

Geordy Rostad · Answer

@Roxanne McClain

The other thing to consider is your personal financial picture. Would it take every last nickel you have to do this deal or would you have enough for some sort of disaster to come along and you could weather it for a while?

Not every real estate investment/investor makes money. Sometimes you lose. I've had three clients now who bought at the auction and ended up losing money on those deals. They were flipping though and not holding them as rentals. There is risk to investing in real estate. Don't fear it, just make sure you understand it.

Landlording is a business and that reminds me of one really important point. Did you factor in a cost for property management? If not, you need to. Even if you are going to self-manage, you need to put it as a line item because you should be paying yourself for that beyond the cashflow. If not, then you're sort of just buying yourself a job at the outset and if that's the case, there are plenty of other deals to grab when you CAN pay for management, and you cashflow right on the buy.

It sounds like you only put PITI, repairs, and vacancy into the calculator? How about capex?

Are you intending to fix up the property when you buy it or just wait until one of the homes goes vacant and deal with it later?

Also, a last point. You should not be afraid to make an offer to the seller that makes sense for you. Go plug ALL the numbers into the calculator including management, capex, closing costs and anything else that might be missing. Then you could even show it to the seller and propose a different price that makes the portfolio meet your target numbers.

Roxanne McClain · Answer

@Wayne Brooks ouch. $1000 a turnover?

Roxanne McClain · Answer

@Wayne Brooks I am sure on my financing. That is not an issue.

I've used all the calculators and the cap ex "looks" good for my area.  The homes where built to be rented and seem to be pretty maintenance friendly.

Three of the four are stained concrete floors, wooden cabin feel walls and doors, and pretty cute vinyl homes on the outside with metal roofs. 3 different properties, 3 different sewer connections, the lot beside the last one is owned by the only other house on the road. The guy that built them is honest, and we where actually just talking about me looking for A rental property when he said "you should but mine" and 4 dropped on my plate.

The house on the street alone, not included. Its the one that scares me.

The repairs came in at % based on what I have saw on bp calculators but I do realize they are alot lower than they actually will be or could be because this is 4 houses, not one.

The tenants that are in these homes have been there a couple of years and he says they are all planning to stay in the homes and want to be sure I want the same.

@Greg H. The 3 properties are all listed on their own parcel of land and have their own meters, and run to the city sewer. I'll have to ask about the older home, it may be on a septic. Any thoughts?

Wayne Brooks · Answer

@Roxanne McClain A couple of points,

Are you sure you’re approved for 15% down on Investment properties, and for four? Usually it’s 25% down.

Did you include PMI?

Your repairs though have at $100/mo for four properties, or $300/year for each house.  No way that will cover normal repairs, capex (ac, appliance, roof replacement) and the cost to repair/refresh in between tenant turnovers. You’ll likely have $1000 or better every time a tenant moves out.

Greg H. · Answer

Lots of questions to be answered:

-Houses on 1 parcel?

-Separately metered?

-One septic or city sewer

My guess is they are on 1 parcel which is always going to make this a more difficult property to sell as it is not FNMA conforming

Keith Higgs · Answer

People starting with rentals may forget about all of the costs they need to take out of that gross rent payment. Principal and Interest, taxes, insurance, utilities paid by the landlord, money set aside for repairs, vacancies. There are several online tools to help you to determine whether the property can be profitable for you. Ultimately, you will become familiar with the cash on cash return, and cap rate calculations - or you will end up owning properties that lose money for you every month.

Is this too good of a deal to pass up?

Most Popular Reply