Cash-flowing property but is it a good deal?

Question

Hello BP!I am in the process of purchasing a home in Kansas City, KS. My math says that I will make over 500/mo in cash after all expenses are paid. Here is the problem... I am paying 85k for this home, the comps in the area show the top top end being around 85k and I still have to put maybe 10k worth of repairs into the property. After my closing costs, down payment, and renovations, I'll be into the property for about $27000, with a loan of $72250, and the market value on the home I expect still around 85-90k. It will be cash flowing but I wont be gaining equity. Any thoughts on this? Bad deal? I'll give you the financial breakdown below.

Purchase Price

85,000

Down payement

12750

Closing costs

4250

rent

1350

Expenses

Property Taxes

76

Vacancy (5%)

66

Maintenance (5%)

66

Cap Ex Reserve (5%)

66

Mortgage Ins.

33

Homeowners ins.

66

Mortgage Payment

413

Total Expenses

786

Monthly Cash Flow

564

Gregory DeRosso · Answer

@Jacob Compton

Just to clarify.  85k purchase plus 10k in renovations. Comps however are 85k. The bank probably won't ok that after appraisal / inspection.   Even though it does look like a 25%ish cash on cash ROI somethings not right. Either your comps are off or your numbers are inflated.

Have you signed already. If not I would go back to the seller with those numbers and at the minimum get the price down to 72k so in the event you have to unload you'll recoup your 10k / closing and broker fees if you sell at comp.

John Teachout · Answer

I don't see putting a laundry in the garage as a money maker (ever) considering the low amount of revenue generation and the high cost of getting water, electric and sewer hookups. Maybe rent the garage separately as a garage/storage? Is the property on a slab, basement or crawl space? If it has a basement or crawl, could you put washer/dryer hookups inside?

Since this property hasn't been fully converted to a multi family, you may want to run the comps as a sfr.

Spitting the utilities (if they aren't separated) may not go as smoothly as you expect.

A single thermostat that controls both units is probably not going to go over very well. Factor in separate HVAC in the future.

Andrew B. · Answer

Whenever someone says they have an amazing cash flowing deal, but they are paying more than market value, I assume they messed up their numbers. Maybe you should start by posting your analysis to see if you missed something.

Kevin Ledding · Answer

So if you put in $27k and (assuming your numbers are accurate) it is paying you $7848/year, that is about 25% cash on cash return.  In 4 years, you have 100% of your money back.  I'm guessing that is a 30 year amortization, which means that in 30 years you will have 100% equity with someone else paying the mortgage, with no further investment in capital, and they keep paying you at the current market rental rate which is likely to only increase.  And that is assuming that the value of your house won't increase, which historically tends to appreciate in most locations, which gives you even more equity.  As long as you aren't planning to flip this imminently you will get your equity... plus cash flow every month.

25% is slightly better than a savings account!  Sounds like a great deal!

Jacob Compton · Answer

@Matt R. I checked it vs rentometer which has rents as high as 1100 but this property was previously renting 1 side for 850.

Nicholas Simeone · Answer

@Jennifer Rysdam

Have you read about California and how they are allowing ADU's where they were outlawed before due to their housing crisis?

I am curious what some of those neighborhoods are going to look like.  I used to live in Long Beach and worked nights.  I remember when I first moved there I didn't have a parking spot and I would usually walk 7 blocks away simply because there was no spot for me to park.

I thought it was merely a cash grab for the cities, and an attempt to regulate properties that fall in disrepair, since a lot of the cities have inspections of the rentals too.

Or in my case, it says right on the form, that its for municipal tax purposes.

One of the really nice neighborhoods in Salt Lake City has a house that they rent to six different people and all the cars there is a sight to behold, I personally wouldn't want that in my neighborhood either.

Jennifer Rysdam · Answer

They have that here in MN in some places too. Mostly college towns. Too many people turning an old 5 bedroom house into a by-the-room rental. Neighbors complain about all of the cars out front taking up all the street parking. Now you need a rental license and it states how many unrelated people can occupy the home.

Nicholas Simeone · Answer

@Jacob Compton

Here you go! It's apparently a thing there too!  https://www.wycokck.org/WycoKCK/media/Neighborhood-Resource-Center/Rental%20Licensing/Documents/Rental-License-Application-Form.pdf

Jacob Compton · Answer

@Kevin Ledding Thanks Kevin! I will have the tenant pay all utilities, yes. I am even planning on making the detached garage into a mini coin-laundromat for extra cash flow.@Andrew B. I am pretty sure my number are accurate but I dont want to post the actual property address/listing.@Dante Feria I have about 10k worth of repairs@Daniel Bradley Yes this is a duplex. It was actually a SFH which a previous owner turned into a duplex.. Currently the thermostat/utilities all go under unit A but I am going to price out installing a new meter for unit B and getting them on a separate utility plan.. If I cant do that, I will pay all utilities and split it between the units. Also, yes, I am local. No property management.@Nicholas Simeone Thanks for the info on your experience... I will look into the rental registration fee (didn't know that was a thing) and the sewer.@Gregory DeRosso I actually estimate low on my rent. My rent I will try to get 550 for 1 unit and 950 for other.. 1350 is conservative. The unit is move-in ready at 85k but there are things that I want to update and finish ... I wouldn't live in it like it is although you could. I won't rent to someone else until the unit is looking how I would expect it to if I were to rent it. The bulk of that 10k will be to turn the deteched garage into a coin-laundromat and getting an electric meter installed for unit B and everything else that goes with that. 10k has not been quoted to me yet but I gave it a high estimate as well.

Kevin Ledding · Answer

All utilities are paid by the renter?  May need to factor that when looking at comps to determine your rental rate.

Cash-flowing property but is it a good deal?

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