new investor potential deal question

[Lauren Finn]

Hi BP!

Just wanted a quick opinion, I am very new to REI and decided to start out wholesaling to build some cash for our first rental property, that being said, while driving for dollars I came across a 3 family nearby my home that we would actually love to purchase for ourselves. He is interested in selling, however he spent the last 20 years renovating it himself and wants to sell on mls for retail price. He's willing to knock some off the price for the realtor fees if we came to an agreement on our own but what I would be paying is still pretty close to ARV or right on. He was going to list for 369k and the only comps my realtor could come up with are for 2 families in the area being around 300-323k. He would accept a "reasonable" offer. It also has 3 long time tenants that bring in $2900 a month in rent and seems like there is room to grow that right away if I wanted to raise them a bit (I would wait though). Every way I ran the numbers still seem like I would cash flow positive even in a worst case scenario (at minimum 500 a month) it's just that we wouldn't build any equity for a while (but we would probably hold onto the property for a long time anyway). I also have to consider we would possibly use a HELOC for the down payment so I'd need to consider the price of paying that off into the income we'd receive. (Also is this a good idea for down payment?)

I guess my question is, for my first property I was originally going for something that needed a bit of work to get a "good deal" on, possibly a BRRRR. Would it be silly to buy something at the top of the market even if it still cash flowed every month, or is it smarter to hold off for something that we can put some sweat equity into?

[Tim Herman]

@Lauren Finn Since you have limited numbers I am using the 50% rule. Half of rental income goes to expenses and half goes to mortgage paydown and profit. $2900/2-$1450. Using my trusty mortgage calculator @ 4% and 100% finance, the payment is $1761 per month or $1761-$1450=negative $311 per month. Over $800 swing.

Find a spreadsheet or rental calculator and include all costs. Your analysis should include hard costs:principal and interest, taxes, insurance, property management, utilities and grounds maintenance if landlord pays. Soft costs are those that aren't periodic or are unknown. These are are to quantify on a monthly basis. So you need to make an educated guess. Vacancy, repairs, and capex.

You never can know when a vacancy can occur. Your local property managers can give you an idea or what is common in your area. But you need to understand what those numbers mean. 2% vacancy is your tenants staying an average of 50 months. Some landlords won't collect rent for 6 months due to covid. To get back to 2% their unit will have to be continuously for 300 months or 25 years before a turnover.. 6/300=1/50. I analyse using 8% or 1 per year.

Repairs. My area it costs me around $150 for a service call. Clogged toilet, appliance repair, etc. My minimum is $50 per month or 5% whatever is higher. You need to save enough to do repairs and paint between turnovers. Paint normally has a lifespan of 3 years. 

Now onto the newbie killer. Capex. All major components have a lifespan. Everything is new, I am only going to use 3%. On a buy and hold this will bite you in the butt. Looking at your triplex.Assume you raise rents to $3000. 3% capex is $90 per month. Let's look at one item in a capex budget. Floors. They have a 10 year life span. Assume 1000 sf of flooring in each unit. My area to replace with a moderate lvp is $6 sf. 3000 sf*$6 sf=$18000/10 year life span/12 months in a year= $150 per month for floors. You are already $60 per month short. That means roof 25 year life span, appliances and hot water heater 12 year life span, hvac 20 year life span, bath and kitchen remodel 20 year life span will come out of your pocket. Capex can never be less only more. Take the floors and say they are 5 years old. To have the property pay you now have to increase the capex for that item. $18000/ 5 year useful life/12 months in a year= $300 per month or double the original. Each property has estimated capex as new. I use 10% minimum.