1st Time Investor - Need Help Analyzing a Deal

[Jenny Sung]

Location - Spring, TX

Built in 1977, 3/2, approx 1500 sqft

Contract Price - $120k

Locked-in Mortgage Rate - 3.5%

Total Monthly Rent - $1450

- Comes with Section 8 Tenant (Mom & 3 kids)

- Buyer pays title insurance

- Big items to account for after inspection:

1. Tree too close to the house, needs to be cut down
2. One side of the garage door opener has no outlet to plug into (there are a total of 2 single garage doors)
3. Kitchen sink drain pipes are "amateurishly" done
4. Rusting of the evaporator coil in the attic (20 yrs old)
5. Attic lines don't have enough insulation
6. One bathroom toilet is cracking and needs to be secured
7. Roof is missing gutters
8. Roof shingles vs flashing wasn't done 100% correct, needs more space

The buyer agreed to a $500 closing cost credit. Would I be dumb to not move forward in this deal?

[Blake Dailey]

To get a great answer you would need to know your total repair cost. But with the items you mentioned, it doesn't sound like anything major unless the roof needs replaced - that could kill your budget and sour the deal. On the surface it looks good, it beats the 1% rule and is likely to cash flow. And a lot of those repairs are things you could bootstrap and do yourself so don't let them scare you away. Run the numbers on your worst case scenario and it if still makes sense then I say go for it. You will learn so much by just doing your first deal and make it that much easier for the second one.

[Austin Bright]

Are property taxes/insurance in the mortgage? How much did you put down? How much cash do you have to sink into repairs? What's the market value on the property before/after repairs?

It meets the 1% rule, but I'd want to know about repairs/debt service. Also, I'm only looking at CF.

[Jenny Sung]

Originally posted by @Austin Bright:

Are property taxes/insurance in the mortgage? How much did you put down? How much cash do you have to sink into repairs? What's the market value on the property before/after repairs?

It meets the 1% rule, but I'd want to know about repairs/debt service. Also, I'm only looking at CF.

Taxes will be around $4k/year and insurance will probably run around $1.2k/year. I'm putting down 20%. I have plenty of cash leftover but I do want to leave enough to grab a second property if I'm lucky enough. 

In terms of after market value, I'm really unsure. My main goal with this property is cash flow.

[Austin Bright]

I plugged it into my calculator and got around around $120-$155/month. Although I may have different assumptions than you.

Namely

Property management expenses (~$200)

Owner paid utilities

Vacancy (~$84/month)

Mtx Reserves (~$100)

My property management expense assumes a 1 yr lease, and does not take into account paying finders fees more than once/year.

How much are repairs? That can throw off return, but could maybe reduce a mtx reserve if they are significant enough. Do you have enough cash for holding costs? Or is it move in ready?

[Marci Mayes]

I live just north of Spring, TX.  Parts of Spring flood.  Does this home have any history of flooding?

[Jenny Sung]

Originally posted by @Marci Mayes:

I live just north of Spring, TX.  Parts of Spring flood.  Does this home have any history of flooding?

No history of flooding, one of the first things I checked! 

[Rob Lee]

Hi Jenny, Have you taken advantage of the BP rental property calculator to run your numbers? Is it safe to assume that your Realtor has provided both rental and sales comps for the area? Have you seen the property in person? Have you seen a signed copy of the current lease? 

Why did you choose Spring, TX? Do you have reason to visit the area at least annually? My wife and I own property out of state. We have found that we can ensure the property manager does a thorough inspection at least once a year when we schedule a visit. During our last visit, we discovered an issue that resulted in a couple of thousand dollars in repairs. It would have been more expensive if the issues had gone undiscovered longer.

[Jenny Sung]

Originally posted by @Rob Lee:

Hi Jenny, Have you taken advantage of the BP rental property calculator to run your numbers? Is it safe to assume that your Realtor has provided both rental and sales comps for the area? Have you seen the property in person? Have you seen a signed copy of the current lease? 

Why did you choose Spring, TX? Do you have reason to visit the area at least annually? My wife and I own property out of state. We have found that we can ensure the property manager does a thorough inspection at least once a year when we schedule a visit. During our last visit, we discovered an issue that resulted in a couple of thousand dollars in repairs. It would have been more expensive if the issues had gone undiscovered longer.

I found this deal as a for sale by owner so no realtors in between. Ran the comps for both rental and sales and yes I did see the property in person and have a copy of the current lease. I'm actually based in Houston right now and am originally from here. 

[Sameer Bhalesha]

What is the ARV based on sold comps? I will not buy a house if I am not getting 30% or more off. Pm me address, and I can give you an estimated ARV.

-----offer price = (ARV * .70) - repairs 

Quick Dirty Check if the property makes sense rental 

-----2% or greater rule = Income / (House Price + Repairs)

I added 20k for repairs. 

$17,400/$140,000 = 12.4% returns 

Beats the 2% rule easy.

Let's say only 40% is net income, and 60% is expanses. Net income would be $6,960. 

4.9% returns if you pay the house in all cash. 

The biggest red flags I see!

🔴make sure to get an inspection report

🔴Confirm repairs costs

🔴100% make sure the area did not flood

🔴I would not invest in a C or D area

🔴You must get a trustworthy agent (I have one I can refer who is only a leasing agent)

🔴Might want to rethink investing far away 

🔴Invest in Commerical, not residential. 

[Ozzy Sirimsi]

@Jenny Sung

Although I don't know the area. It is an Okay deal to start.

None of the repairs are major. If you know a local person, all of them can be done easily.

Section 8 tenants tend to stay longer if they are comfortable, so if %1 is fits your goal, it looks

like an okay deal.

[Michael Jones]

Pass. I just had a deal come across my e-mail in Temple/Belton (TX) where the home was built in the late 80's or 90's around the same price and it will be a much better situation with similar economics.

If you're going to be a long-term buy and hold investor, shoot for newer properties. In this environment, make sure that you have the cash to handle property issues. The tenant is Section 8 which can be nice, but I'd focus more on the property.

[Mark Sewell]

@Jenny Sung I would be able to run you some ARV comps today, if you wanted, but it sounds like you are already comfortable there.

Roof and HVAC are your big items here - the minor plumbing items can be fixed in a day or two.  Just be sure you have a good handle on those big ticket items.  I mean, everybody has to get a new roof eventually, and that HVAC might also be due for some modernization.  But that sets you up for the long term, and you should have nice solid little house that spits out some good cash flow.  

And I am pretty certain you'll get some good appreciation in Spring, on top of your cash flow.

Somebody here suggested running this through the BP calculator and I think that is a great exercise. 

And the flood question is BIG.  Maybe check with your local insurance agent to see if you will need flood insurance on this property (they get a history of flood claims when they do this).

[Ronald Rohde]

Are you assuming the loan? Or is that your new debt? Review the Lease carefully, sec 8 has updates with COVID-19, is her income secure?