Please: Some advice on my first (potential) rental property

[Robert James]

Hi there, thanks for taking the time to read this.

I am considering putting an offer in on a piece of property in my town. The assessed value of the property is $130,000, although there are foundation issues with the home and I believe I could pick it up for between $80,000 to $90,000 (contingent upon foundation inspection and repair estimate, of course - a previous quote put the cost of foundation repair at $20,000). After a good analysis of comps in the area, I believe the after repair value of the property is about $150,000 to $160,000 (it's in a great location). The unit is currently rented to long-term tenants at $775 per month. Market rate is probably $850 to $925, although it would require some TLC.

I have secured private financing from family, so I will essentially put nothing down, and just pay interest on the $80,000 to $90,000 at 5%. My plan would be to refinance after 1 year or whenever foundation issues are resolved, hopefully at or below 5%, and pull out some equity.

When I crunch the numbers, I basically break even (i.e., net zero) on Day 1 on the rental income after expenses. Rent is $775, about $375 per month goes to interest payments, and $400 goes to taxes, insurance, vacancy, repairs and property management. So, it doesn't immediately cash flow.

However, my thinking is this:

• 1) Assuming the foundation is not legally required to be fixed immediately, allow current tenants to remain at current rate until a major expense arises or tenants leave
• 2) Fix foundation and generally upgrade the house once tenants have left (budgeting $35,000 in my head)
• 3a) Rent out at competitive market rates to new tenants (should cash flow positive), or
• 3b) Rent out on Airbnb at competitive market rates (should be more cash flow positive), or
• 3c) Sell property if market is favorable

So, my question is this: should I pursue this deal or does it just not make sense? Of course I want it to be cash flow positive on Day 1, but $80,000 homes in this location are very difficult to come by. I've also got private financing at a favorable rate. Plus there is upside in the home assuming that the market doesn't completely tank. I would appreciate any thoughts you have! Thanks!

[Tim Herman]

@Robert James Pass. Not even meeting the 1% rule. If market rate is $925 your all in budget is $92500 after repairs. You didn't show what percentage you are using for vacancy repairs and property management. You don't even list CAPEX as a category. If you had owned this as a rental and had a CAPEX built in of 10% of rents @$775. $20000/$75= 266 months to pay for the foundation.