First Time Investors - Should we buy this property ?

Question

Hi Everyone,

My wife and I are looking at buying our first rental property. The house we are looking at is a 3/1. Its a very solid house. It has a new roof, new hot water heater, and a newer AC unit. The only problem is the house is not in the best area. It’s in an area where there is a lot of housing authority property’s being built. What’s really drawing our attention is the Cash flow. It would be around $200. The property is $55,000 and we would have to put 20% down for a 20 year term. Everything adds up except for the location. Does anyone have experience investing in property’s around housing authority developments? We really worry about the property depreciating. Is this a possibility?

Any advice helps! Thank you!

Steven G. · Answer

Is the $140 total reserves for cap ex/maintenance/vacancies being taken out of the $224 cash flow? or are the $140 reserves being taken out of your gross income, leaving $224 after reserves have been accounted for?If your cash flow is $224 after reserves, and you get a PM for a total of $149, that would actually leave you with $75/month of positive cash flow.If reserves weren't accounted for, you're actually at $84/month without a PM ($224 "cash flow" -$140 reserves =$84 actual cash flow), and $-65 with a PM. But that can't be right. What am I missing here?This has been my biggest question regarding reserves and cash flow, and my greatest point of confusion in looking at everyone's numbers. I might just start my own thread asking about this, but would love to hear your thoughts Dustin!

Alyssa Dyer · Answer

First, congrats on your first deal! Whether it's this one or another. I have a couple thoughts. 1. With cheaper properties / low income tenants your team is absolutely critical. If the team managing the property is comfortable with low income and has systems to protect you, go for it! If the team isn't "sold" on the deal, don't do it. The process is nuanced and mistakes are easy. 2. Personal opinion on this one- I think you can win with *almost* any type of deal. New construction. Historic. Single family. Multifamily. Low income. Subsidized. Private pay. I always say "know your goals and buy with eyes wide open." There's a switch cost for everything. If high cash flow is important to you, you'll *likely* have to make concessions on location and/or condition. If you concede on location, just make sure your screening is tight. If you concede on condition, make sure you have reserves in place. If low maintenance is important, you'll *likely* have to concede on equity or cash flow. 3. I buy low income so I am biased but I think it sounds like a stellar deal. Not a right or a wrong here IMO. I'm happy to take a look at inspections or whatever if that would help you! Hope this helps!

Dustin Perkins · Answer

@Steven Kane I would really like both appreciation and cash flow, but I don’t think the property will appreciate much. I would much rather a higher cash flow (preferably around $200),but we really want to get our feet wet. If I didn’t have a PM this property would produce $200 cash flow, but it’s in an area I am very unfamiliar with, so I would only do it with a PM. To answer your question, is it worth it? I’m not really sure, but I think it would be a good learning experience. If it would be in a better area with around $200 cash flow and it appreciated in an area that I’m more familiar with, that would be slam dunk for us.

Dustin Perkins · Answer

Thank you everyone for your guidance! This is very helpful! I've only spoke to one property manager. I told her my concerns about the neighbor hood and she said they actually have a property on the same street. She said it rents well and they have never had a problem. I am going to reach out to a few more property managers today to get their thoughts. Thanks again! This has been very helpful!

Chris London · Answer

@Dustin Perkins I find myself not considering any defects that I cannot change for buy/hold. Examples would be a terribly steep driveway, being on a busy road or any other incurable functional obsolescence. I can always buy a new roof/HWH/AC so I don't get worried if they are dated. Not sure how the low-income housing nearby you mention affects your property but I wouldn't ignore it if potential renters aren't going to ignore it. You mention concerns about depreciation however if this is a rental and you are counting cash flow you want to focus on vacancy over appreciation.Let us know how it goes and good luck!

Dustin Perkins · Answer

@Steven Kane I get the $224 after I account for reserves and and the $149 after I account for reserves and a PM. Is this what you we’re asking?

Dustin Perkins · Answer

Hi @Steven Kane! So we submitted the offer $5,000 under the asking price at $50,000 (closing cost is supposed to be around $2,000). If the deal goes through the cash flow will be $224 without a property manager. If we hired a property manager it would be around $149 based on the prices I received (Most of them were around $75 a month). I am setting aside $50 a month for cap ex, $50 a month for maintenance, and $40 a month for vacancies. I'm not sure if my reserves are enough, but this is what I came up with after reading some post and watching videos. Any insight here would help!

Scott Robinson · Answer

@Dustin Perkins The numbers on paper will often look stellar for properties in bad locations. Sometimes in the same neighborhood one street will be bad because the homeless shelter is located on it while the next street over doesnt have any problems. This is where you really need to check with your property manager to see what they think. They typically know the areas best and can tell you whether or not to buy. All my properties are in D class areas and 17 of my 21 doors are section 8. I have a good section 8 property ma ager and these properties perform really well because if that. Ive heard many horror stories about section 8 not taking care of olaces and I have to say that is most likely the exception, bot the rule. If your PM brings in good people you will be fine. Just make sure your PM is really ggod with this tyoe if property. Some PMs specialize in A class or B class and you dont want yo have a PM that thinks the same way as an A class PM. Different types of properties require different types of management.Good luck!

Johnny Wolff · Answer

@Dustin Perkins - think @Alyssa Dyer's answer is spot on. These high yield props are much harder to manage and in some such areas you can get into a jam if you lose your PM1) No other good PMs in the area2) PMs in these higher yield areas can be picky and choose not to accept properties that don't rent for $1K or more per unit.Recommend you call a few other property management companies and see if they'd take the house under management in a pinch

James Mc Ree · Answer

Look for deferred maintenance in the area. Are houses missing doors, windows, siding? The look of the neighborhood is what your property will gravitate towards despite your best intentions. Look for a neighborhood maintained close to the way you want to maintain your property.Are many windows boarded up? Is there broken glass where cars are parked? Is there much crime in the area? Can you safely go in and out of the neighborhood? These are some indications of war zones. Avoid as your property will be impacted.How does the immediate area you are considering compare to a few blocks away in all directions? Can you make your same $200 or more cash flow plus equity nearby with a few more location benefits? It's something to consider. Is there creeping doom coming towards your area (paragraph above). You want to be in the path of renovation, not devastation, if you can.Notice I haven't written "public housing" yet. The concerns above are some of the negative stereotypes of public housing, but they are not unique to public housing. They are largely the result of crime and neglect, which oftentimes tracks with public housing. Look at what the area contains and how it is maintained as that is probably a better indicator of your success than how people pay their rent.