Is this a good first REI deal???

Question

Okay I found a property that fits the criteria of my REI plan. It's in a very desirable neighborhood that gets great rental income. For my first investment property I didn't want to buy super cheap in a ghetto area, so I knew I'd have to be paying more up front than it sounds most people do on this site but think long term will pay off.  It is a 3br/2ba SFH that was listed under $200K b/c the listing agent knew it would generate a ton of interest quickly.  They are only taking offers through weekend.  My agent and I both agreed that we need to go in at $222,500 w/$4K seller concessions.  Houses in that area (although with larger lots) are going for $300K plus.  This is also an unusual lot in that it is land locked with no street access, which brings value down from others.  I posted a fake ad on Craigslist to see if I'd get response at $1700/mth and had about 20 responses within a couple hours.  I think I could raise to $1800 or more and easily still find good renter.  I've done a spreadsheet including all estimated costs and out of pocket expenses and look like I could cash flow around $300/mth which I figure good for first investment and I know place will hold value.  What do you guys think? Does this make sense?  Anything I need to be careful of here?  Owner has lived several years and it is in very good condition.  Only thing I will be sure to check out thoroughly is roof as it is a flat roof and they don't know how old.  Any advice y'all can give would be much appreciated!!!!

James H. · Answer

I feel that if you are paying 225K and renting for 1800, you would be loosing money. I can't see how you would "cash flow" 300/month with these numbers unless you were putting a HUGE down payment - like 75K or more.

Ben Leybovich · Answer

Cathy,

What would a 4-plex like that appraise for if it is in excellent condition?  What would the rents be?

Tim Delp · Answer

I agree with the other posters, it appears you are emotionally attached to this house and the neighborhood.  Also sounds as though you may be dealing with a realtor that doesn't know investment properties well for long term investors looking for cash flow.  I agree that landlocked and flat roof present issues as well.  As the others have mentioned we are assuming you are putting between 20 to 25% down and that is a large sum of money for the little bit of cash flow.  Renters that can afford to pay $1,700 to $1,800 are typically upwardly mobile renters that can afford to buy and will eventually buy or get relocated for work.  
I would suggest thinking very hard on this one if you want to be a long term investor in cash flowing rentals it may appear that you are wanting to play it safe by not buying in what you call the ghetto, but I think you can find more blue collar middle class neighborhoods where you could buy two houses with the capital you are putting out and have $300 cash flow on each house I would imagine and not be in the ghetto.  
As mentioned above the problem with high rents is when you are sitting empty you quickly eat up any of the cash flow you build up.  If you have new renters on average every 18 months and you are really good and average turning the property in 45 days that is $2,550 in rent you didn't receive, that is almost 1 year of cash flow assuming you had no repairs you had to make.  
Sounds as though if you own this property long term you would be breaking even after vacancy and repairs.

Cathy Moore · Answer

Thanks for all the helpful advice! Ben, I am open to small multi family but they are VERY hard to find at a reasonable price around here. I did hear the lot next door to this one has 2 multifamily buildings going on the market soon for $375 and $415 each (4 units a piece) and I bet they need a lot of work...I'm just hesitant for my first deal to go to the scarier neighborhoods, which is where you can still find those under $100K properties that need a lot of work which is why I was considering this one in a very established neighborhood

Ben Leybovich · Answer

Cathy,

In my opinion - NO.  Landlocked property and a flat roof are problems indeed.  But the big issue is that it’s simply too dangerous.  $300 of CF per month with revenue of $1,700 means that your operating expenses + cost of money is $1,400.

A tenant moves out.  You loose $1,400 in one month plus $2,000 to clean the place up in a heart bit.  That is all of your annual cash flow and then some.

Furthermore, if you finance this house with a 75% LTV note, your down-payment requirement would be $55,625 (25%).  Even if you manage to keep your entire annual cash flow of $3,600, this is a 6.5% cash on cash return ($3,600/$55,625).  This should not excite you.  You will be taking on a lot of risk for a very low return.

In my opinion, this is much too skinny.  Have you considered a small multi-family?

R. Kerry Brooks · Answer

Cathy Moore just seems like a lot of risk to cash flow 300.00 or so a month. By the way don't want to sound critical, just giving my opinion I have made a lot of mistakes in my learning process. Hope to help others not make as many.

Why do you see it as bargain? Is it just a buy and hold for you? Will you be financing (appears financing from your answer)?

I would think that most investors on the site would agree a good deal is no more than 70% all in (I prefer 65%) which would put a property valued at 250k some were around 162,500 then minus any rehab cost, holding cost , closing cost and any other contingencies.

Hope you take this as just my take. Ultimately you are the one buying and it has to make since to you.

Cathy Moore · Answer

I would be able to afford the payment for several months with my savings if that were to happen. The house will go above list b/c in this location the property will prob appraise close to $250. The biggest issues for me are the flat roof and no street access. The house does have access to an alley where the driveway/garage are. I would imagine during inspection it may reveal the roof needs replacement and I would require a replacement credit from the seller or price reduction to cover costs of that to cover my butt.  I'm not emotionally attached to the place, I just think for the area it's in it's a bargain even at $219.

Patrick Snyder · Answer

I have to agree with Jeff; flat roofs can be a nightmare.  And with as much potential that exists for heavy snow in Denver, I would wonder why that was ever done.

Also, does lack of street access concern you from a re-sale standpoint?

Jeff S. · Answer

My advice: Don't buy a flat roof.

R. Kerry Brooks · Answer

Cathy Moore my first question is if it does not rent can you afford payment? No matter if test marketing makes you think it will, it might not. If it sits for 3mths what would that do to you financially?

Second observation is after running quick numbers, it seems like a low ROI. On buy and hold houses this is more my concern than LTV or ARV. Both of which seem on the high end just using the basic numbers you gave.

Third why would you ever want to offer more than they are asking, for me that is crazy! Don't get emotional, it is a box on dirt. Make your best offer win or lose then move to the next.

Just my two cents worth, others may see differently. I would pass or offer lower than the 200k they have it listed for.

Is this a good first REI deal???

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