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

[Adam L.]

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

[Kevin S.]

@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: $5k

Monthly income: $1,150

Monthly 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: $57.50

Capital Expenditures 10% of rent: $115.00

Management 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!