Would You Do This Deal? (Question from a Newby)

Question

First of all, I want to thank everyone for their contributions to this site. Reading here and doing research is the only reason I’m confident enough to consider getting into rental properties (and hopefully build long-term wealth).

I have found a property that I’m interested in and I’m curious to hear if you more seasoned investors would go for it.I know it’s impossible to know online, but I’ll give you everything I know:

• 2 Flat – both 2 bed/ 1 bath
• Listed at $119k, realtor indicated that there’d be some flexibility so I’m hoping to get it under $110k.
• Estimated Rehab $15k (I’m going to firm this up significantly before closing).
• Rentometer says fair rent is $900/unit.My gut knowing the area is that $700-$750/unit is a safer estimate.
• Taxes of $4,600
• Tenants would pay utilities, but I’d probably hire a lawn cutting/snow shoveling crew.
• Visibly looks like a single family and surrounded by other SFH on quiet street near pretty good schools.
• A partner and I are able to put down 25% and pay rehab costs up front.

It’s in an older, but relatively stable southwest suburb of Chicago.Taxes suck in this town, but otherwise it’s an appealing town for me to be in.

If anyone has thoughts I’d love to hear them.

Jeff Valentino · Answer

I do not personally. You can use craigslist etc to run "comps" for rentals in the area.

Jay V. · Answer

@Jeff Valentino

the property is in Lockport, which won't get me quite the same rents as Orland.  I hope that $700 is a little conservative, but I'm trying to make sure I have cushion here to stay profitable.

Do you have rentals in the area?

Jeff Valentino · Answer

Hey @J V. I like your initials!

Most people figure 8% vacancy rate (1 mo per year), so you probably should too. I would also figure 8-10% for maintenance for your "other" operating expense.

Depending which town you're talking about in the SW burbs you could pick up quite a bit on that rent. Do you mind sharing the town?

Best,

Jeff

Mike Moles · Answer

Missing CAPEX, Repairs/maintenance and as you said vacancy.  Also property manager (or even a realtor to rent it when vacant) if you will end up using one, most say to budget it even if you don't.  Excluding the down payment for financing cash flow is negative, how much depends on what these actual expenses will be.  Experienced investors say (I'm not experienced) it's not if you will incur these expenses but when and how much they will be.  Exclude the deposit because depending on the deal cash flow can be made positive as the down payment increases.  Look at Cash on Cash return to evaluate the deal including the cash invested.  I'm still learning myself, this is just what I've picked up from BP so take my opinion with a grain of salt!

Anant B. · Answer

Sorry - I goofed up on my spreadsheet. Now I see the positive cash flow after fixing. You should be good with this one. Thanks for correcting me.

Jay V. · Answer

Anant,

I appreciate your input, but not sure I follow your math.  I see monthly (rounded):

Revenue:         $1,400

Mortgage:        ($500)

Taxes:              ($400)

Insurance:         ($75)

Other Op Exp:  ($100)

Monthly Net:$   325

As I mentioned, this does not include vacancy.  Vacancy does scare me, but other than that I think I'm conservative with everything above (including rents).  I will not be paying a Management Fee at least until I get the rents up over a few years.

Am I missing something?

Anant B. · Answer

I am not sure how you are getting 300/mo cash flow from this. If I understood correctly your acquisition cost 110K + 15 K rehab. Your putting 25% down - that about 27.5K. You are into this property at 42.5 K. Your debt service is about 499/mo at 5.5% interest.

Your taxes are 4600 and you have not considered Insurance about 700/yr, Management Fee at 8% and of course vacancy at 6%. Your gross income is about 1500. You do the math and you have a negative cash flow of 250/mo with even considering vacancy out of equation (assuming 0% vacancy). Even if you take management fee out you are still with negative 190 cash flow.

Not sure how you ended up with 300/mo positive cash flow. To me numbers don't make sense unless I am missing something here.

Arlan Potter · Answer

the renters may your mortgage and taxes, and expenses, and also $300 to you each month. Sounds sweet to me.

George P. · Answer

115k for ~$1700 in rent each month? that's a good deal. not great, but good... a good start.

Jay V. · Answer

Thanks Gerald.

I actually ran my own numbers and estimated ~$300/mo cash flow (conservatively), but that's without vacancies.  Vacancies scare me a little because I'm not an experienced landlord.  Also, I was just wondering if the more seasoned investors would put $40k into something that cash flows ~$300/month.

I know - taxes are TERRIBLE out here.  They really eat into potential profit.

I really appreciate your input.  I welcome other opinions too.

Thanks!