is this deal worth the time?

Question

here are the details.

I just bought a house 3 streets away for $75k. i had to put only 6k in that house and rented it for $1,150.

So, this new one is a  SFR, asking price of 80k, which is overpriced when you take into account how many upgrades it needs....which are:

Windows	                $6,500
House Roof	        $4,800
Waterproofing 	 $3,000 (might not have to do it)
Driveway repair	        $2,800
Garage Roof	        $2,250
Plumbing	        $1,500
Furnace &AC	        $1,500
Garage Door	        $1,350
glass block basement windows	$1,000
Water heater	        $700
Replaceelectrical riser	$650
Repair garage trim	$575
Garage Opener	        $350

So, give or take, it would cost me around 25k (and my track record shows i go over my estimates  :oops:  ) in the next few yrs.

My immediate fixes that would need to be done are roof, plumbing, water heater, paint, carpet in order to get it rented. That would be around 11k.

What i am trying to say is that spending 11k to get a renter in means that i would not be breaking even for quite awhile. I know that all houses eventually will need a new roof, new windows, etc, etc, but this house needs all that up front before i even get a renter, with a monthly rent for $1,150.

my initial thought is to offer 61.5k how can i tell if even that low ball number is too much? how can i evaluate this deal over the short and long term?

Jon Holdman · Answer

I decided working through the math might help.  Here's how I would evalute these two deals.  I'll assume 6%, 30 year loans with 25% down, down payment and rehab costs out of pocket.  I'll use the 50% rule to determine NOI.  I assume rent is $1150 on both, so that leaves NOI of $575.

First house, $75,000 purchase price plus $6,000 in rehab.  
All in: $81,000
Loan: $56,250
Cash invested: $24,750
Payment: $337.25
Cash flow: $237.75
Cash on cash: 12%

Second house, $70,000 purchase plus $11,000 in rehab
All in: $81,000 (I picked a purchase price to make this the same as above.)
Loan: $52,500
Cash Invested: $28,500
Payment: $314.76
Cash flow: $260.24
Cash on cash return: 11%

So, the cash flow is a little higher because the loan is lower.  But the higher initial outlay slightly reduces your cash on cash return.  If you could buy this at $61,500, then you're all in at $72,500 and your cash on cash is 14%.

George P. · Answer

they countered at 68 and i upped my offer to 63k. they accepted it.

no concessions, just inspection. they currently have tenants in there and i will approach the tenants and see if they want to stay in the house (if they can qualify, check out of course).

i am getting a 5.22 interest, 25% down, 30 yrs. based on my numbers, i have a 31% cash on cash return.

will update when more information is available.

George P. · Answer

i offered 56k for that house that they were asking 80k, and they countered at 69.9k. to be honest, that's where the house should have started if they wanted to have lots of offers.

so, i am still evaluating it. the spreadsheet tells me that i am at 3k annual cash flow, with a total ROI at around 14%.

but of course those numbers depend on the inputs and i am estimating the input parameters based on my gut feel.

George P. · Answer

thanks for the replies (for some reason i did not get a notification of these replies, that's why i am just following up).

vonville, these two houses are identical. in fact, all the houses in that sub are identitical, cookie cutter type houses (lot, sq. footage, age, rooms, etc, etc.)

Jon, that makes a lot of sense and the numbers never lie. The way i see it though is that my net monthly profit would be around $550 (give or take). I have to spend at a minimum $11k (roof, bath update, plumbing update, electrical riser)IMMEDIATELY.

whic means, that even with $550 profit per month, it would take me longer than 2-3 yrs before i see any positive cash flow.

In the meantime, since i can't add the amount i need for the repairs to the loan, i will be depleting my cash reserves.

My other homes starting paying back within the first year. This one is a great home, but it has higher update cost for a rental home. If it was for a flip home, it would be totally different.

Jon Holdman · Answer

I lump all the up front and acquisition costs together as the "all in" price of the house.  The first house is $81K all in for $1150 in rent.  That seems pretty decent.   If this second house will have similar rents, being all in at about the same price would be OK.

Now, depending on how you do the deal, more repairs can mean more cash out of pocket.  Even if the loan is smaller and the cash flow higher, that may result in lower cash-on-cash returns.

Voncille Denson · Answer

Please do your homework.  Compare apples to apples homes recently sold in area within 3 months max 6 month.  Age of home to compare within 5 years of subject property same sq. ft. br/bath as close and possible. (do you have a property inspector if you can't find values that could give insight).  Began to deduct from that price ALL needed repairs.   Buy it right so very important.  Make sure you include a cushion for unexpected repairs.  You need a reserve if you are going to rent piti (maybe vacant for few months) and set aside for repairs.   Set your price stick to it and detail all needed repairs to get your subject property in tip top shape.  If its worth it deal if not walk away there will be others.  Best of everything V

is this deal worth the time?

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