New Rental Investor Help. Am I Over-Analyzing?

[Mark Oliver]

Hi. I'm a newbie here and in RE investing. I've been doing my homework, reading, and looking at properties as much as I can. I've made one offer that was outright rejected (it was a low-ball but I felt it was reasonable). Background: I'm an engineer by education and worked in the off-highway equipment industry for but have been a SAHD and started a handyman business since my 3 kids were born. I work a few days a week as a handyman and am thinking for focus more on RE going forward than growing the handyman business. I rather use these skills and tools to make money than to have a job.... My kids are young now so I can only dedicate about 15-20 hours a week to RE or other activities. I'm hopefully that I'll be able to devote more time once my kids are in school.... if kids ever really go back to school. My wife works as a Physician with lots of hours, stress, and moderate risk (who knows where our health care system is going). We'd like to get to the point that she can reduce her working hours in 5-10 years. My goal is to generate at least $100,000 per year in income in 5-10 years. I like the idea of buy and hold multi-unit properties. I am not apposed to putting work into something up front but would prefer not to do a major reno at this point given my time and lack of a contractor network. We have just under $100k in liquid cash to work with. We could get another $30k as a HELOC and $30k from a 401k loan if needed. We have about $1 million in IRA money that I have considered do a self directed IRA from, but am a little weary of this. Our credit is over 750 for both of us. Sorry for the long introduction but I felt it best to frame my questions.

I have a couple properties I'm crunching the numbers on right now but will only include one as an example to try to avoid confusion. My primary goal is positive cash flow and I'd like to have >10% CoC. One confusing point I'm seeing is that some people seem to calculate cash flow differently. (i.e. they include fewer expenses than I do) I'll paste an example of my calculations below. I realize I'm quite conservative (anal) in my calculations but everything I see suggests that weak up front assumptions are a big cause of failure. I'm trying to be realistic.....

The example property I'm looking at:

-  Address = 300 S. 2nd St Harrisburg, PA

-$159k asking price at ~30 DOM and no offers.  My  best attempt at comps makes me think a bank will appraise for about $110k max

- In the historic district but also a flood zone.  Built 1900

- 2 units.  1 x 1BR/BA0 and 1 x 4BR and 1 BA.  Current rent potential at ~$800 and $1100

-  Property is generally well maintained but not updated since major flood in 1972.

-  It has off-street parking which is very rare in this area.

-  Nearby to business district, state capital, large hospital (with some residents), small university, etc.  1 block to river and 1 block to "entertainment district".  Our target renter would be young professionals presumably.

-  My two main options are to rent it as-is or renovate and get approx. $300 per unit more per month.  I'd estimate reno costs to be between $25k and $75k depending on how far you went.  The $75k would get the full +$300 and $25 would probably get an extra $100/month

-  Most surrounding properties have been updated to semi-luxury rentals and are getting $1100 and $1400 per month rent for similar sized units without parking.

-  Below is one shot at my analysis of the numbers.  Significant assumptions are flood insurance, one turnover per year due to more transient renters (young professionals) in the area, yearly maintenance of 3% due to age and likely need for new roof in near future.  The analysis below includes $30k investment to spruce it up a bit.

Main Questions:

- Am I over-analyzing or being too conservative (or maybe the opposite....)?

- Is there a better way to go about this, or should I keep looking....or?  I've listed a summary of 3 potential offers that yield similar results in my mind at least....

-  Should I lower my ConC expectations given my conservative analysis tendencies?

Offer Options:

Offer 1:

$60k Cash purchase

Flood insurability contingency

Contingent acceptable results of roof inspection at buyer's cost

Close in 30 days

Offer 2:

$90k purchase

$10k down $80k + buyers closing costs in seller finance at 5% 20 year terms with 10 year balloon No prepay penalty (~$545/month)

Flood insurability contingency

Contingent acceptable results of roof inspection at buyer's cost

Close in 30 days

Offer 3:

$90k purchase

Contingent on 80% personal loan (i.e. appraisal)

Inspection contingency

Flood insurability contingency

Contingent acceptable results of roof inspection at buyer's cost

Close in 60 days

Monthly Cash Flow Analysis
Scheduled Rent	2,100.00
Laundry (Est)	0.00
Other	0.00
Vacancy %	(168.00)	8%
Vacancy Loss
Total Income	1,932.00
Accounting	(25.00)
Legal	(20.83)
Advertising
Business Expenses
Electricity
Eviction	(20.83)	2 units
Garbage	(64.71)
Gas/fuel
Groundskeeping		Currently tenants
Insurance (dwelling)	(33.00)
Turnover Cost	(187.50)	1 turnover/ year at $1500
Insurance (liability)	0.00
Flood Insurance	(166.67)
Licenses	(18.33)
Management	(42.67)	6% + 1 turnover
Office Supplies and postage	(10.00)
Pest Control
Pool Upkeep
Property Taxes	(244.33)
Repair and Maintenance + Cap Ex	(225.00)	-2700
Snow Removal
HOA Fees
Telephone
Water and Sewer	(95.83)
Cash Investment	48,000.00	20%
Property Purchase Price	90,000.00
Total Financed	69,300.00	80k to seller loan
Loan 1 Descpription	Personal Loan
Loan Amount
Cash Down
Interest Rate	3.50%
Points	0.00%
Points Cost	$0.00
Closing Costs	-$2,700.00	3.00%
Term
Average Monthly Interest in first year
Monthly Payment	-$402.00	No escrow included
	.
Total Monthly Expenses	-$1,556.71
Cash Flow	$375.29
Cash on Cash	9.38%
Cap Rate	25.76%