Opinion about a deal?

Question

So I have a deal under contract right now. Im currently in the option period(inspection is today). We have looked at and made offers on several on and off market deals. Most of the houses for sale right now need work or updating. The other houses available would cost us about as much if not more to buy and rehab to be able to get the rent we want. This one could use some love but nothing major.

The house that we have under contract is in a great neighborhood that we are very familiar with. We have watched the value of houses in this neighborhood climb like crazy over the years. The tax assessed value has gone up about 10k$ every year consistently.

This house was built in 2013, vinyl plank floors, granite countertops, pex plumbing, 1450sqft plus garage and fenced in back yard.

We got it for $220000, which is high for our market, but less than asking. PITI with 20% down at 4.325% interest would be about $1290 and we would rent for 1600/month. We have renters ready to go after we close.

We have about $70k in the bank at the moment, but Im struggling with wanting to put down $50k in down payment and closing for this house for $300/mo cashflow. I feel like it would limit me from being able to buy the next deal, or find one that we could brrrr, or something.

Am I being dumb for struggling with wanting to commit to this deal??

How can I negotiate a better price after the fact??

Any thoughts, suggestions that might be helpful?

Pete Harper · Answer

@Corie Carpentier

I think you are a little light on your expense estimate.

Vacancy 5-10%

Maintenance  5-10%

Property Manager 8-10%

Your $300/month is going to be eaten away pretty fast.

It’s a really tough market to cash flow in right now. Any opportunity to push rents higher?  If it were me I’d like to see more than $2000/month on this deal.

Andrew West · Answer

@Corie Carpentier if I may be so bold, I'm going to say this deal will NOT cash flow for you. Looks like you haven't budgeted for any expenses beyond your mortgage payment in your analysis. Namely, you'll want to plan for maintenance, capex, and vacancy (echoing the wise words from @Pete Harper and @Jaron Walling!). With self-managing and a newer home, you can ideally keep these low, but it's still important to estimate them in your analysis.

I made this mistake when I became an "accidental landlord" several years ago before finding BP. The rent was $650 more than my mortgage which I thought was a home run. However, after expenses, we were barely breaking even and decided to sell after a few years.

Better deals are out there! Good luck!

Greg Scott · Answer

$300/mo on a $70K investment is only 5% return which is low.  This would only make sense to me if it appraised for significantly higher after your updates (which seems unlikely) so that you could do a cash-out refi or sell within a short period.

FWIW, I'm concerned you are using some questionable metrics to judge what makes a good deal:

• Taxable value going up is bad because taxes then go up.  Frankly, the government is horrible at assessing value.  Your best case scenario is that real value goes up but the tax man is asleep and doesn't raised the assessed value.  (It happens)
• Historical appreciation is no guarantee of future appreciation
• Getting a house for less than asking doesn't mean anything as most homeowners are also bad at gauging true value

Since you are in central Texas, have you looked into Lifestyles Unlimited?  They have excellent training on how to analyze deals.  I've even seen them put out some new-construction offerings in Huntsville that have better returns than what you have noted here.

Jaron Walling · Answer

From one investor to another I wouldn't pull the trigger. Like others have mentioned it cash-flows but it's not much and you can't really add value/cash-out ReFi in the near future. It doesn't meet the 1% rule. I only have a few rentals myself but I negotiated lower and bought my self tons of rehab work. This deal doesn't give you any flexibility and simply locks in $50K for ____ of years.

I'm sure it's frustrating reading these responses but I've learned a great deal about patience since joining this website. It's the part of investing I hate because there are so many bad/risky/meh deals right now.

Renee Moomey · Answer

Once you are under contract, the price is no longer negotiable, unless something major happened with inspections or if the home doesn't appraise and these contingencies are part of your offer. Do you have an experienced realtor on your team? One who understands your long and short term goals and has experience working with investors? This is the first place you should direct your questions. That person should also be the local expert on your team supplying you with the market evals that you need to set your mind at ease to to help you with a possible exit strategy the differs from long term rental. If these numbers make you nervous, know exactly how the numbers have to work for you before putting in the next offer. Getting the jitters now is common, but may be too late to rethink your numbers.

Andrew West · Answer

Smart move @Corie Carpentier.

To be honest, being under contract is not the time to reconsider a deal due to numbers. Due diligence and contingency clauses are your opportunity to back out due to new discoveries that you didn't know about before making/getting an offer accepted (i.e. inspection findings or appraisal issues). It feels like faulty logic and, frankly, irresponsible to use those as an avenue to bail because you ran your numbers wrong.

I'm fairly new to the game and would love to see a discussion on this. Anyone else have thoughts? Is this common practice?

Corie Carpentier · Answer

Thank you to everyone who provided input. This is exactly what i was looking for! Thanks for being honest with me

I think im going to back out while i still can and try to find a better deal!

Matt M. · Answer

@Corie Carpentier

Not a good deal in my book

Dan H. · Answer

As multiple post have indicated, the OPS cash flow projection is missing a lot of expenses.  I agree with Peter's sentiment, but maintenance/cap ex at 10% on a $1600/month SFH is way too low ($160/month).  I suspect closer to double the $160/month.  I include tenant turnover costs (but not the lost rent) in my maintenance/cap ex.

This property has negative long-term cash flow and relies on appreciation (rent and market) to provide a return.

If OP is under contract, they need to use a contingency to break contract or they risk consequences (loss of Earnest deposit and potentially damages).  It is not clear to me that they have a contingency to allow them to walk away without consequences.  In my state it is common for the contracts to have a certain amount of days to walk for any reason, but in a hot market like this that contingency is sometimes removed.

BTW even if you self manage, you want to include PM fees in the pro forma.  This is 1) because managing is work 2) in the future you may decide PM is not something you desire 3) as you scale, at some point you cannot self manage without it becoming a full time job.  We self manage virtually all of our units and it takes a lot of time.  I deal with contractors every week.  We have tenant issues to deal with most weeks.  Basically, if I self manage I deserve to be compensated for the effort and this compensation should be separate from the return of the investment.

Good luck

Corie Carpentier · Answer

@Pete Harper

I would be manging the property myself for now so i didnt estimate that.

I dont think i that i could get much more than $1600/Mo right now

Opinion about a deal?

Most Popular Reply