Is this a good deal?

[Simo Hak]

I saw a house that is up for sale in my town ( Louisville, KY). It is a single family house advertised for $69,900 and I was able to get the seller to go down to $64,500.

Here are the facts about the house

Single Family Home 2bedrooms 1 bath updated Bungalow with convenient location. Updated Tilt-in Thermopane Windows, HVAC, Bath, Flooring, Roof. Front bedroom lacks built-in closet, Master Bedroom has wall of closets. Washer & Dryer stay, Nice fully fenced rear yard. Plus storage shed.

Lot Size: 0.14 Acres & House is Sq. Feet: 800

Seller is selling as is with no repairs and I am required to pay the closing costs.

I am willing to put 20% down therefore avoiding PMI. The purchase of this home is solely to rent and have no desire to "flip" or sell within few years.

The rent average of similar homes in the area is $750 - $850

Is this a good deal? Any advice is greatly appreciated as this will be my first real investment

[Will Barnard]

No offense but I am not sure what school everybody here went to regarding cash flow. Other than Michael, everybody seems to be missing a ton of expenses that WILL occur overtime.

There is no way possible for any home on any area of this country with gross rents of $800 to kick off the goal of $450 monthly cash flow. Before anyone makes the "what if you pay all cash argument", I would counter with the fact that you must account for the opportunity of that cash. In other words, you may increase cash flow, but you decrease cash on cash, a double edged sword. So, sticking with the 20% down! you will have vacancy loss, loss to rent, advertising expenses, legal expenses, accounting expenses, eviction expenses, repairs and maintenance, utilities when vacant, makeready costs, capital expenses (new roof, new HVAC, etc). For rents in this range, I would expect all costs (operating, vacancy, and capital) to be about 45% of the gross! then minus debt service costs. By the way, when people use PITI, they are actually mixing some operating costs (insurance and taxes) with debt service (principle and interest), therefore, I think a better formula to use is the 50% rule (ir 45% in this case study) and then subtract debt service. What is left is your true cash flow to spend.

So for this investment, the debt service is $261.45 monthly, less $360 in monthly costs, which results in a cash flow of $178.55 based on $800 in monthly rent. Assuming no repairs or deferred maintenance are needed to get to your first tenant, and your cash outlay for acquisition plus closing costs and loan fees are about $15k, your COC (.cash on cash) is 14.3%. I would say for your first deal, that is not too shabby and it hits the minimum standard target of at least $100 per door in cash flow. Not your target cash flow of $450k, but do 3 deals just like this and you will have it.

Next item, you definitely SHOULD look at the exit side of this. Getting into a rental home that may be very difficult to sell down the road if need be is not a risk you should take. Always buy what others in the area want the most, that keeps you in a safer place when you do need to exit, even if your plan is to hold for life. Life has a way of changing circumstances and having options is always a good thing. Hope this advice is found to be constructive and helpful as it is meant to.