(Metro) Detroit, BRRRR, Rental Properties - Considering Section 8

[David Kassab]

Hello everyone,

Cheers to my first time posting on BP!

I am looking at the small-cap asset market in the (Metro) Detroit area (because it's the only market that I know). I've put together a quick proforma and I wanted to get some (semi-)professional opinions.

Case Study:

• Cash deal (no financing for purchasing/rehabbing)
• Asset ~$20,000; Rehab ~$3,000; Closing costs/fees ~$2,000
• Total out-of-pocket: ~$25,000
• 2-3 Bedrooms, 1-2 Baths; Rent $700-$850
• Annual Gross Revenue: ~$9,000
• Property Tax ~$1,500; Property Insurance ~$1,000; Property Management ~$1,000; Vacancy Loss ~$1,000; Replacement Reserves ~$1,000
• Annual Operating Expenses: ~$5,500
• Annual Net Profit: ~$3,500
• Cash on Cash: $3,500/$25,000 = 14.0%

Risk Profile:

Rental properties in low-income areas carries the risk of vacancy, damages, delinquent payments, and evictions.

Risk Mitigation:

I see paying a Property Management company as being a great way to help with: sourcing the most reliable tenants, bi-annual interior/exterior inspections, and handling the delinquencies/evictions. 

I see Section 8 as being a great way to help with guaranteeing a portion of the annual rental contracts.

The city of Detroit allows a max. of 1.5x the monthly rent to be required as a security deposit (to help pay for any damages that may incur).

Also, I would required myself to set aside ~$1,000 annually (over 1x monthly rent) to help with any vacancies that may occur between tenants (see Annual Operating Expenses above).

Upside:

If the cash on cash wasn't enough to make your mouth water, then I offer an additional option of financing the property (post-rehab) in order to provide the liquidity required to repeat this process hopefully every 1-2 years !

Worst case scenario is that I don't find it worth my time to operate a rental such as this. In which case, I could sell the property and get almost all of my out-of-pocket cash back.

Thoughts? What am I missing!? Thanks!

-David

[Brad T.]

Hi David,

  Welcome to BP.  Are you able to get bank financing?  I would prefer to use that 25K to leverage into a 100K house in a better area and get better tenants, more appreciation, higher rent, and better return overall.

Brad