Can Someone help me analize a potential offer?

Question

I live and plan to invest in the northeast, but I've been to Florida recently and I love it there, I would love to buy a place in the Tampa Bay area, as a rental investment for now, with plans of maybe moving there in the next three years. the property I'm looking at is a SFH, and Im thinking of offering 25 thousand dollars less than what the asking price is.

The problem I see is that when I put the deal in the Rental calculator, my Cash on cash return is 8.5% and I honestly want to stick to at least 15% cash on cash return, so that my money can sleep well at night.  Am I being unreasonable in expecting those kinds of returns in that area, or is my offer to high?  I am calculating an 8% vacancy rate a 10  percent management fee, a 10% capital expenditure, 2% increase in value and a 7% sales cost.  Am I missing something?

Jonathan Henley · Answer

I grew up in New Port Richey so I know the area well, and I'd say picking up a decent house for 50k (even with the roof violation) would be a steal.  I'm not sure how your COC is coming out so low though...are the insurance premiums really high?  I just purchased a SFR in Tampa (contract inspections are today) that was listed at 75k and went to contract at 62k without any further negotiation, right off the MLS.  It needs about $9,000 in repairs and I'm putting 20% down, but even after figuring that in I'm sitting at 20.7% COC return assuming a lower-than-market-value of $1,050 in rent.  Getting a COC over 10% is DEFINITELY possible in New Port Richey, so I would double check all your numbers.  If you aren't getting that then it probably isn't that great of a deal.  Hopefully you just have a number in the wrong spot and that's artificially reducing your return.  One mistake I made a few times was when entering the cost of insurance: I would enter the annual premium but the calculator is actually asking for the MONTHLY premium.  That threw my numbers WAY off!  NPR is a nice place to live and the Old Town/Main Street is being fixed up really nice.  Good luck with the offer!

Chris Troutner · Answer

@Luiny Tavares when I run your numbers I'm getting 28%+ CoC return.  It may be you have an annual number plugged into a monthly number. I estimated $65/month in insurance and $67/month in property taxes, the rest of the numbers are based on what you posted. I'd take that deal all day.  Always make sure you get an inspection and check sinkhole records just to be safe. Good Luck.

Brent Coombs · Answer

@Luiny Tavares, we need to know: what purchase $ you're talking about? What percentage deposit? What percentage (of purchase $) gross Rental return per month?

You're allowed to be ambitious! If some deals can get 15% CoC, why should you settle for less? Your problem will be if you limit yourself to only buying a property that you feel you might be living in within a few years time. [Property Taxes? Does 10% cap ex include maintenance?]...

Alton Shady · Answer

@Luiny Tavares Living in the NPR area, I would definitely recommend getting an inspection if you are not able to inspect the property yourself just to be sure of any sinkhole indications. As you've built in a contingency on the roof, you should be good there. Good luck and great job finding a good deal!

Luiny Tavares · Answer

thanks Again @Chris Troutner I saw the error of my way, I think you did not include property management costs, but on my side I was forgetting to recalculate the 20 percent down on the original price to the offer price.  I feel much better about the deal now so lets see how it goes.  I appreciate the Sinkhole education.  @Jonathan Henley thanks for the heads up, I will not let mother nature play with my Head, but I will allow it to play with my pockets, so if I can't get it insured I will probably not dabble in it.

Jonathan Henley · Answer

Sinkholes are tough to deal with.  I often see properties with remediated sinkholes at a big discount, but I haven't taken the plunge on one.  Sinkhole coverage can be outrageously expensive, if it is available at all.  My houses are insured by a major company in FL and they will not issue any new sinkhole policies.  At the least, know that it is HIGHLY unlikely that a basic homeowner's policy will cover them; you need to specifically request that kind of coverage.  I'm sure others have had different experiences, but in the 30 years I've lived in Pasco I have never seen or been affected by a sinkhole.  It is certainly a risk, but it isn't high on my list of concerns when buying a property.

Chris Troutner · Answer

@Luiny Tavares. I checked my numbers and I entered the wrong property tax. It still shows 22% CoC.  Here is the sample. Let me know if you can access it.  https://www.biggerpockets.com/calculators/shared/501909/a44db2b9-1b06-49ec-b227-ed2adc72d473

My rental properties are in Port Richey and New Port Richey and I market to those areas as well as Pinellas County.  Sinkholes are more prevalent in Pasco County.  You have to be more careful in off-market deals because the seller may not disclose a sinkhole. I had an instance where I found a permit for an investigation and none for remediation. It turns out the owner used the insurance money to pay off the mortgage rather than repair the sinkhole.

Luiny Tavares · Answer

thanks @Brent Coombs on my best calculations im only getting a $134/m cash flow, I will get a video course on using the calculator. and Thanks @Chris Troutner the property taxes are almost 1200 so about 100 a month. and the other thing that worries me is the mention of a sinkhole in a previous inspection, your a Buckeye state guy and you've heard of Sinkholes; i'm from New York never heard of those.  what I envision in my head, is the ground swallowing up my property, would regular home insurance cover that or would I need additional insurance for that? @Jonathan Henley help me out with that question since your from the area, you would know.

and BTW thanks guys I feel allot better trying to invest with so much knowledge and experience on my side.

Brent Coombs · Answer

I reckon the above post from Jonathan Henley looks like good local advice. Have you got your Lender lined up? (ie. Most Lenders require you to be borrowing more than $50k, right?)

By my calculations, in order to get 15% CoC, you only need a net cash flow of $212/m.

If you can't get that, from a gross rent of $1,000/m, what are you doing wrong? Cheers...

Luiny Tavares · Answer

Hey @Gabe Amedee thanks for the feed back. yea seeking advice from local experts will definitely help I'm just weary that most people don't actually analyze their home purchase as a proper investment, therefore figuring out what the general COC returns might actually not be sound investment strategy.

Happy Holidays.

Can Someone help me analize a potential offer?

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