Would love some feed back or thoughts on this.I'm looking at a private sale of a rental house. What do you think? I would need to purchase all in cash immediately and then re-finance later. $145k price, must be all cash (zestimate @ $158k, Redfin @ $190k)$5k closing fees$3700 annual taxes3BR, 1Bahas a long term tenant (husband, wife, 2 small kids) since 2016rent $1150/mo. Tenant pays all utilities.lease signed until May 2020...would probably extend againwell maintained and new-ish interiorRound Rock, TX, suburb of Austin. walking distance to Dell Campusgood pocketI live about 15 minutes away from hereI wouldn't need to do a management companythe owner is moving out of state and doesn't want to deal w/ a management company

@Adam L. When I evaluate something like this, I evaluate it as if I was financing 100% (outside of closing costs) of it because that shows you how much money you would make with basically very little cash in the deal. The thought process is that if it doesn't cash flow positively at 100% financed, then all you are doing with your cash downpayment (or full cash payment) is buying cash flow. I threw your numbers and a few assumptions into a spreadsheet to get the following:Purchase Price: $145k @ 4.5% 30 yr mortgage - $735.21 per month mortgage payment Closing Costs: $5kMonthly income: $1,150Monthly taxes: $308.33 ($3700/12)Monthly insurance: $115 (Not knowing your area I totally guessed on this, you might call around and get some quotes so you can estimate this correctly)Vacancy 8% of monthly rent: $92 (I use 8% because 1/12 = 8.33%, so you basically would save up 1 month's rent each year)Repairs and Maintenance 5% of rent: $57.50Capital Expenditures 10% of rent: $115.00Management Fees 10% of rent: $115.00 (even if you plan to self-manage the property, it's still a good idea to estimate this, one day you may need to hire one, plus is accounts for the cost of your efforts)The net result is negative cash flow of ($388.04). If everything remains the same but you pay 100% cash for the property you end up cash flowing positive $346.65 per month, BUT your cash on cash return on investment (total annual cash flow of 346.65 x 12 = $4,159.8 / $150k of cash spent) is only 2.77% which is not a good return on your investment. Heck, you can put your cash in an Ally Bank account and make 2.10% on it with it just sitting there. Overall this would be a pass for me, but maybe there's an upside I'm not seeing. Maybe you can get the price down or raise rents, but I wouldn't necessarily count on that. Good luck!

@Adam L. Why does it have to be all cash? A seller demanding all cash it should be a red flag. Does that mean that a bank won't approve the condition of the property? Or will a bank not appraise for that price? A house in round rock proper for $145k is a home run though, on the surface of it. The median house price for 78664 is 248k. Why would anyone want to sell their property for a huge discount? So, it probably has some issues with it. Cool. Discount is there. What are the fix up costs, if any? I would find out more about the tenant situation. Is the tenant leaving soon? Has the tenant destroyed the place? What kinda condition is it in? Those are just a few questions that pop up in my mind.

@Adam L. 1) you can't be afraid to raise rents to market rate (assuming you're city/state doesn't cap rent increases), each year your expenses on the property are going to adjust for inflation so your rent should too. However if they have a full year left on the lease you can't make any changes for 12 months, which means that any opportunity to increase rent is offset by 12 months of loses from lower rent. 2) It may be close to a corporate park, but are there a bunch of other rental options near there too? It sounds to me like you are just guessing at vacancy. If you don't have any true data to back that up then I question whether you can rely on that. Call some local property managers or try to connect with other local investors and see if they can weigh in on vacancy.3) This is just me personally, but I don't invest based on what I think the property value will be. To quote you "so maybe property value will rise and rise and rise" yes sometimes you get lucky and this happens, but not always. Basically this is you speculating, whereas rental income is a known number and can be counted on (assuming you account for vacancy). 4) Like I said, I model at 100% because I want to know what return I would get when I spend as little money as possible (basically just closing costs). The 80/20 rule is based on banks typically requiring somewhere between 20-25% downpayments on a mortgage for an investment property. If I were buying an investment property with a mortgage I would do two models, one at 100% to know what my return is with little money invested, and one at whatever my true downpayment is to find out my actual return (knowing that the difference between the two is me just basically buying cash flow).

@Adam L.Hi Adam, The property at $145k doesn’t exactly touch the 1% rule. The rent would have to be at least $1450/mo. Not saying that every deal should be analyzed through the 1% rule, but that $1150/mo rent is definitely not enough (as mentioned above) to cover all your expenses. Glad you passed on this deal in my opinion.

If you know the tenant is leaving anyway then you'll avoid any drama in raising the rent to market values. So now all you need is find out the market rent in the area.DON'T PANIC! This won't the last opportunity to come your way. If the numbers work, they work, and if they don't, they don't. Don't pay too much, and the worst that can happen is you'll have to sell sooner than you expected, not a whole lot worse for the wear.

@Adam L. also...just reread your initial post and missed the part about refinancing later. Optimistically assuming it appraises at the Redfin number and you do an 80% LTV refi to avoid PMI, your mortgage payment is $830. You’re now cash flow negative by over $400/mo

Hey Adam,Having been born and raised in the Austin area and currently residing in Round Rock, TX, I can say this seems to be a common trend in local areas. You have to consider with all the new development going on the prices will go higher as many investors shift their focus more towards Pflugerville, Round Rock, Georgetown. That being said the notorious 1% rule can be a little more elusive to find but not impossible...yet. For a property to start at $145k even for a 1 bath is steal. The appreciation will definitely be the major factor on this deal. Thank you for the follow up on your post, I'm always curious to see the out comes. Are you a buy and hold kind of investor or flipper, or both?

It's a judgement call. A new roof should last 15 to 20 years. A 20 year old roof -- less. When is the last time the HVAC system was serviced? Are those pipes PVC, copper -- or rust? There is no one answer that will fit every situation, altho if you talk to enough experienced property owners, you can get an idea of what you can use for comparison purposes.It also depends on your plans. Are you keeping the place as an heirloom for your as yet unborn grandkids? Or are you selling as soon as enough appreciation kicks in? If you plan to sell in 5 years, who cares about a roof good for another 15?I usually like 3 to 5% of rent altho you didn't hear that from me!

Real estate professionals usually ignore Zestimates due to ridiculous lack of reliability, and I doubt Redfin is any better, and particularly given the wide disparity between one and the other, you might want to do your own comparables.It's not that hard. Find all the nearby similar properties that sold in the last few months, throw out the cheapest sale price and the most expensive sale price, and average the rest. Although I'm sure other people have other methods.Don't worry if the previous owner doesn't want to deal with a management company. He/she is going to deal with you and/or your agent. You can always get a management company later, long after the sale has concluded.Visit www.dealcheck.io and load the numbers in. See what kind of results you get for things like cashflow, cash on cash return, internal rate of return. Take a look at how insurance, maintenance, Capital Expenditures and other expenses may ruin all of those. Or, you can use the BP calculator, altho I haven't tried that one yet.

If you're looking for cashflow, this is not the right property. Once financed you'll be in the negative and taking money out of your bank account every month to hold it.Either the price is too high or the rent is too low.

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Updated over 5 years ago, 07/03/2019

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Posts: 16
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Adam L.Poster

Buying & Selling Real Estate

still timid to buy first deal...how does this look?

Adam L.Poster

Posted June 27, 2019 19:44

Would love some feed back or thoughts on this.

I'm looking at a private sale of a rental house. What do you think? I would need to purchase all in cash immediately and then re-finance later.

$145k price, must be all cash
- (zestimate @ $158k, Redfin @ $190k)
- $5k closing fees
- $3700 annual taxes
3BR, 1Ba
has a long term tenant (husband, wife, 2 small kids) since 2016
- rent $1150/mo. Tenant pays all utilities.
- lease signed until May 2020...would probably extend again
- well maintained and new-ish interior
Round Rock, TX, suburb of Austin.
- walking distance to Dell Campus
- good pocket
- I live about 15 minutes away from here
- I wouldn't need to do a management company
the owner is moving out of state and doesn't want to deal w/ a management company

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