My first real estate investment

Real Estate Deal Analysis & Advice
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My first real estate investment

Richie Thomas
Rental Property Investor · Sedona, AZ · Member since 2018 · 260 posts · 141 votes

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $277,000
Cash invested: approximately $70,000

4BR/2BA single-family long-term rental in Madison Alabama.

What made you interested in investing in this type of deal?

This was my first real estate deal. I became interested in real estate after listening to the BiggerPockets podcasts for several years.  After analyzing multiple markets, I zeroed in on Alabama in general because it has the 2nd-lowest real estate taxes in the country (after Hawaii), as well as its landlord-friendly eviction laws.  I became interested in Huntsville in particular because of its diverse employment base (Facebook data center, Toyota plant, Redstone Arsenal, and the multitude of aerospace/defense contractors).

How did you find this deal and how did you negotiate it?

Sourced via MLS. Found my realtor here on BP, she negotiated on my behalf. She is also my property manager, since I am an out-of-state investor.

How did you finance this deal?

Realtor introduced me to a local lender who ended up being the lowest interest rate (out of 10+ lenders I price-compared).

How did you add value to the deal?

I provided 25% of the total capital required, and 100% of the cash-to-close. In addition, I initially found the property via my MLS research and provided the due diligence necessary to determine the property's investment potential.

What was the outcome?

After minimal cosmetic rehab (about $4.5k in paint etc.), the PM was able to find a credit-worthy tenant with an excellent rental history, and signed a 12-month lease at $1,750/month.

Lessons learned? Challenges?

The monthly rent was a bit less than I had budgeted for. My lesson is that it's a bad idea to rely on your realtor to tell you if a certain monthly rent is realistic. It's like asking your barber if you need a haircut. Nevertheless, the deal does still cash-flow positively, largely because I made sure to include a margin of safety in my cash-flow projections.

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Mark Cruse
Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes
4y

@Peter McDonough I honestly dont feel it's constructive to tell a newbie what they did was terrible and will lose money. If you feel these things are true the appropriate stance would be to educate them on things they should consider for the next deal and add advice on how to mitigate potential problems that will occur now. Comments alluding to a 50k median income equates to a bad renter speaks volumes within itself. Competent realtor or not, no matter what it's hard to get a hard hitting SF deal on the MLS. My point in all this is the game is already very complicated and this individual took the courage to do what many will not/cannot. Yes, it appears there may be concerns here but it's not a forgone conclusion that its horrible and they will automatically lose money. Just takes strategy!

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  • Caleb Bryant
    Rental Property Investor · Huntsville, AL · Member since 2015 · 401 posts · 309 votes
    4y

    @Richie Thomas way to get in the game! Madison is a great spot to own property

    1Reply
  • Mark Cruse
    Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes
    4y

    @Richie Thomas congratulations. There are so many people who talk about it and never do anything about it. You jumped in and made it happen. I dont know that area but what is your cash flow? What is your return for the capital you have in? Seems like it may be tight for that purchase price. I'm assuming its a good community so is there an appreciation play in this venture as well? 

    1Reply
  • Nick Shri
    Rental Property Investor · VA · Member since 2020 · 218 posts · 133 votes
    4y

    @Richie Thomas Congratulations on pulling the strings and getting in the game! The journey gets more exciting from here. 

    1Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    4y

    Real estate agents definitely aren't the best at evaluating rents, but even it still it looks like a good property and a good start. Congrats!

    Podcast Guest on Show #121
    1Reply
  • Richie Thomas
    OP
    Rental Property Investor · Sedona, AZ · Member since 2018 · 260 posts · 141 votes
    4y

    @Mark Cruse I was hoping to make this a pure cash-flow play, and have any appreciation just be gravy on top. Unfortunately I'll probably end up banking on some appreciation as well, since my early guess is that the cash-flow, while positive, is too thin to completely cover a large, unexpected CapEx expenditure. Honestly, I mostly look at this as a win because a) I was able to get in the game, and b) I learned a lot from this first purchase. Hopefully I'm wrong about the cash flow being too thin, but that's TBD. Thanks for your kind words!

    0Reply
  • Richie Thomas
    OP
    Rental Property Investor · Sedona, AZ · Member since 2018 · 260 posts · 141 votes
    4y

    @Caleb Bryant thanks for your post!  Happy to be investing in the Huntsville area, it's a great community.

    1Reply
  • Richie Thomas
    OP
    Rental Property Investor · Sedona, AZ · Member since 2018 · 260 posts · 141 votes
    4y

    @Nick Shri thanks!

    0Reply
  • Richie Thomas
    OP
    Rental Property Investor · Sedona, AZ · Member since 2018 · 260 posts · 141 votes
    4y

    @Andrew Syrios thanks!  Yeah this is at best a base hit I think, but for a first deal that's good enough for me.

    2Reply
  • Luis De Jesus
    Rental Property Investor · Ocala, FL · Member since 2020 · 33 posts · 15 votes
    4y

    @Richie Thomas Congratulations.  I am looking for my first deal myself.  May I ask, when you calculate for cashflow, are you accounting for vacancy, repair/maintenance, capEX and property management and still coming out cash flow positive??  

    0Reply
  • Peter McDonough
    Rental Property Investor · Huntsville, AL · Member since 2015 · 181 posts · 136 votes
    4y

    I don't think congratulations are in order.  This is a terrible deal.  You will lose money on it.

    You bought a 275k house in Triana, where the median income is something like 40-50k a year. How do you expect to find good renters? The house is not in "madison" it's just in the madison city school district. Good for fooling out of towners looking for a one year rental that don't know the area and are only looking at schools. Are you ready to pay to turn this property in 12 months? Looks like you closed in late march, so at interest rates were still fairly low. That said, 50% of rent probably doesn't even cover PITI. Looks like that house will require both a new roof and a new HVAC within 2-3 years---how exactly do plan to pay for those? Throw more money at the situtation?

    You need to find a competent realtor or a local who can point you in the right direction.

    Plus, is that a converted garage on the front in a neighborhood full of new builds?!  Yikes!

    3Reply
  • Mark Cruse
    Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes
    4y

    @Peter McDonough I honestly dont feel it's constructive to tell a newbie what they did was terrible and will lose money. If you feel these things are true the appropriate stance would be to educate them on things they should consider for the next deal and add advice on how to mitigate potential problems that will occur now. Comments alluding to a 50k median income equates to a bad renter speaks volumes within itself. Competent realtor or not, no matter what it's hard to get a hard hitting SF deal on the MLS. My point in all this is the game is already very complicated and this individual took the courage to do what many will not/cannot. Yes, it appears there may be concerns here but it's not a forgone conclusion that its horrible and they will automatically lose money. Just takes strategy!

    7Reply
  • Peter McDonough
    Rental Property Investor · Huntsville, AL · Member since 2015 · 181 posts · 136 votes
    4y

    Oh ok here's a tip.  Don't spend 277k for 1750 in monthly rent.

    4Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    4y
    Quote from @Richie Thomas:

    @Andrew Syrios thanks!  Yeah this is at best a base hit I think, but for a first deal that's good enough for me.


     Trying too hard to hit home runs can, often times, lead to striking out

    Podcast Guest on Show #121
    2Reply
  • Richie Thomas
    OP
    Rental Property Investor · Sedona, AZ · Member since 2018 · 260 posts · 141 votes
    4y

    @Mark Cruse thanks for speaking up for us newbies, I thought I recognized Peter's negativity from a previous post I made here.  Not sure what his end goal is with his repeated tactlessness, I think he could have conveyed the concerns he mentioned in a more professional way, but I have a pretty thick skin.  I'm happy to take the useful info from his comments and ignore the rest.

    2Reply
  • Peter McDonough
    Rental Property Investor · Huntsville, AL · Member since 2015 · 181 posts · 136 votes
    4y

    At industry standard 55% expense ratio, and a rent of 1750, this 277k property has a cap rate of 3.4%.  Since you closed on this deal in mid-March, I suspect your interest rate on the property is somewhere in the mid to low 4s.  

    In other words, I hypothesize that you have negative leverage on this investment, and thus will slowly lose money over time unless you get large rent increases or huge appreciation gains, or can cut operating expenses.

    Rent increases: I don't think you'll get large rent increases because folks that can afford that larger rent and want Madison City schools will actually just go and live in a nicer house in Madison.  This house is in Triana(way south of Madison), where the median renter is fairly low income, so this property puts you at the very top of the market--which makes it difficult to bump rents.

    Appreciation gains: The house has a converted garage to make it a 4 bedroom house, and is relatively newly built, so there's not a huge amount of potential value add.  From the county data, looks like this property sold for about 130k in 2016.  Huntsville is likely going to see some appreciation, but I don't think I'd count on a doubling on house value in the next 5 years.

    Cut operating expenses: You're out of state on this one, so can't save money doing work on the property yourself, or managing it yourself, convert to short term rental, etc.  House will require a new HVAC and new roof within 3-5 years due to age, possible water heater, etc.   Due to the factors listed above, I think the renter profile will end up being folks who only stay one year, then move elsewhere.  You'll have consistent yearly 8-16% vacancy and continued yearly turnover costs.

    4Reply
  • Dena Puliatti
    Property Manager · Huntsville, AL · Member since 2017 · 302 posts · 246 votes
    4y

    @Andrew Syrios I agree with you that real estate agents are not the best on reality rents.  Better to use an investor agent/property manager.  That way you know that we are telling you the best information because we work in that industry and have to answer to you once the property closes.  We all know comps can be skewed to close a deal.

    2Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    4y

    Congratulations on this investment @Richie Thomas ! 

    1Reply
  • Richie Thomas
    OP
    Rental Property Investor · Sedona, AZ · Member since 2018 · 260 posts · 141 votes
    4y
    Quote from @Peter McDonough:

    At industry standard 55% expense ratio, and a rent of 1750, this 277k property has a cap rate of 3.4%.  Since you closed on this deal in mid-March, I suspect your interest rate on the property is somewhere in the mid to low 4s.  

    In other words, I hypothesize that you have negative leverage on this investment, and thus will slowly lose money over time unless you get large rent increases or huge appreciation gains, or can cut operating expenses.

    Rent increases: I don't think you'll get large rent increases because folks that can afford that larger rent and want Madison City schools will actually just go and live in a nicer house in Madison.  This house is in Triana(way south of Madison), where the median renter is fairly low income, so this property puts you at the very top of the market--which makes it difficult to bump rents.

    Appreciation gains: The house has a converted garage to make it a 4 bedroom house, and is relatively newly built, so there's not a huge amount of potential value add.  From the county data, looks like this property sold for about 130k in 2016.  Huntsville is likely going to see some appreciation, but I don't think I'd count on a doubling on house value in the next 5 years.

    Cut operating expenses: You're out of state on this one, so can't save money doing work on the property yourself, or managing it yourself, convert to short term rental, etc.  House will require a new HVAC and new roof within 3-5 years due to age, possible water heater, etc.   Due to the factors listed above, I think the renter profile will end up being folks who only stay one year, then move elsewhere.  You'll have consistent yearly 8-16% vacancy and continued yearly turnover costs.


     Thank you for talking through your thought process, Peter.  This is the kind of information which newbies like me really need, in order to level up.  While reading through your post and Googling some of the terms, I learned about things like what negative leverage is and how to determine whether it is present based on comparing the cap rate with the interest rate.  And yes, you're quite close on the interest rate- 4.625%.

    I appreciate you taking the time to craft a follow-up response.

    2Reply
  • Richie Thomas
    OP
    Rental Property Investor · Sedona, AZ · Member since 2018 · 260 posts · 141 votes
    4y

    Thanks @Dmitriy Fomichenko!

    0Reply
  • Charles Pope
    Rental Property Investor · Albertville, AL · Member since 2016 · 18 posts · 6 votes
    4y

    Sadly, I agree with Peter on this investment.  $1750 in rent for $277,000 purchase price???  I don't see this one cash flowing or the ability to cover upcoming capital needs. Madison County is a great market, but the numbers have to work.  

    1Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    4y
    Quote from @Dena Puliatti:

    @Andrew Syrios I agree with you that real estate agents are not the best on reality rents.  Better to use an investor agent/property manager.  That way you know that we are telling you the best information because we work in that industry and have to answer to you once the property closes.  We all know comps can be skewed to close a deal.


    True. There are also a lot of good websites (i.e. Zillow, Trulia, etc.) to use to get an idea just for valuation purposes instead of talking to a property manager (although that's a good thing to do when you're close to contract or under contract). 

    Podcast Guest on Show #121
    1Reply
  • Michael S.
    Huntsville, AL · Member since 2018 · 577 posts · 864 votes
    4y

    @Richie Thomas - congrats on taking the plunge.  Even if your first property is not a home run, the experience and education owning a rental property can not be obtained from some guru or book.  I remember another thread where you were vetting different options;  good to see you move forward on a purchase.  

    I think @Peter McDonough 3rd post in this thread has a lot of valuable insight.  It's always hard to hear criticism of a deal you've worked hard at and invested time and money in.  That said, if you take what you learn from your 1st deal, and apply to your 5th deal, and then your 10th deal, you can later look back and see how far you've come in your investing career.  

    Triana is a bit of a wild card area - with the growth west of Huntsville/Madison, it could play out well long term.  Time will tell.  Did you visit the area before investing here?

    There is one thing I am curious about - you mention your agent is also a property manager. But are they an investor also in real estate? Do they own rental properties themselves? Do they work primarily with investors? I am going to guess the answer is "no" to all 3 of the above; I could be wrong, of course. Their insight into property management is of benefit - they got you 1750 in Triana, which is a good rate in my opinion. But an agent who's also an investor would have given pause to a $277k house that rents for 1750, and made sure you were aware of the numbers on it not being favorable for cash flow. I'm not saying to find another agent - I'm saying take their expertise in rental analysis potential, and use that information to run your own numbers independently for your next property for cash flow and COC.

    Again, congrats on your journey into REI.

    1Reply
  • Richie Thomas
    OP
    Rental Property Investor · Sedona, AZ · Member since 2018 · 260 posts · 141 votes
    4y
    Quote from @Andrew Syrios:
    Quote from @Dena Puliatti:

    @Andrew Syrios I agree with you that real estate agents are not the best on reality rents.  Better to use an investor agent/property manager.  That way you know that we are telling you the best information because we work in that industry and have to answer to you once the property closes.  We all know comps can be skewed to close a deal.


    True. There are also a lot of good websites (i.e. Zillow, Trulia, etc.) to use to get an idea just for valuation purposes instead of talking to a property manager (although that's a good thing to do when you're close to contract or under contract). 


    At first I was fully convinced on the idea of using an agent who is also a PM, for the reason Dena mentioned.  However the agent who sold me the property also owns the PM company I use, so now I'm not so sure that it's the fail-safe I thought it would be.  Although to be honest, even if we *had successfully achieved the monthly rent we mutually targeted, it wouldn't have been enough to achieve the cap rate Peter mentioned, so it's not completely down to that error.  On my next deal, I plan on simply looking up comp properties on Apartments.com.  That alone would have likely saved me from making the mistakes mentioned in this thread.  

    0Reply
  • Richie Thomas
    OP
    Rental Property Investor · Sedona, AZ · Member since 2018 · 260 posts · 141 votes
    4y
    Quote from @Michael S.:

    @Richie Thomas - congrats on taking the plunge.  Even if your first property is not a home run, the experience and education owning a rental property can not be obtained from some guru or book.  I remember another thread where you were vetting different options;  good to see you move forward on a purchase.  

    I think @Peter McDonough 3rd post in this thread has a lot of valuable insight.  It's always hard to hear criticism of a deal you've worked hard at and invested time and money in.  That said, if you take what you learn from your 1st deal, and apply to your 5th deal, and then your 10th deal, you can later look back and see how far you've come in your investing career.  

    Triana is a bit of a wild card area - with the growth west of Huntsville/Madison, it could play out well long term.  Time will tell.  Did you visit the area before investing here?

    There is one thing I am curious about - you mention your agent is also a property manager. But are they an investor also in real estate? Do they own rental properties themselves? Do they work primarily with investors? I am going to guess the answer is "no" to all 3 of the above; I could be wrong, of course. Their insight into property management is of benefit - they got you 1750 in Triana, which is a good rate in my opinion. But an agent who's also an investor would have given pause to a $277k house that rents for 1750, and made sure you were aware of the numbers on it not being favorable for cash flow. I'm not saying to find another agent - I'm saying take their expertise in rental analysis potential, and use that information to run your own numbers independently for your next property for cash flow and COC.

    Again, congrats on your journey into REI.

    Hi Michael. I've seen many of your comments as well, and I always learn something from them. Thanks for following my progress.

    To answer your questions: I visited the Huntsville and Madison areas in 2020, but not the Triana area. My agent has references from multiple investors here on BP, but I don't actually remember whether she herself is an investor. The answer to that question may have gotten lost in the shuffle of all my initial research. Another thing I'm kicking myself over now.

    When we were deciding whether to pull the trigger on the deal, I mentioned "The numbers work if we can get a minimum of $1900" (incorrect in retrospect, I admit). She replied "$1900 could work!". I grant there's some wiggle room with the word "could", but still I get the impression that I'd be better served by another realtor on my next deal. Specifically, one who (as you mentioned) is a) an investor themselves, and b) is willing to tell me those hard truths you mentioned before we pull the trigger on a deal. Investing locally is not an option for me (I live in a state whose prices exceed my down-payment budget), so I need a "boots-on-the-ground" team that I can rely on to help me avoid the mistakes of this deal.

    Thanks again for adding your thoughts to the discussion.

    0Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    4y
    Quote from @Richie Thomas:
    Quote from @Andrew Syrios:
    Quote from @Dena Puliatti:

    @Andrew Syrios I agree with you that real estate agents are not the best on reality rents.  Better to use an investor agent/property manager.  That way you know that we are telling you the best information because we work in that industry and have to answer to you once the property closes.  We all know comps can be skewed to close a deal.


    True. There are also a lot of good websites (i.e. Zillow, Trulia, etc.) to use to get an idea just for valuation purposes instead of talking to a property manager (although that's a good thing to do when you're close to contract or under contract). 


    At first I was fully convinced on the idea of using an agent who is also a PM, for the reason Dena mentioned.  However the agent who sold me the property also owns the PM company I use, so now I'm not so sure that it's the fail-safe I thought it would be.  Although to be honest, even if we *had successfully achieved the monthly rent we mutually targeted, it wouldn't have been enough to achieve the cap rate Peter mentioned, so it's not completely down to that error.  On my next deal, I plan on simply looking up comp properties on Apartments.com.  That alone would have likely saved me from making the mistakes mentioned in this thread.  


     Property managers usually have the incentive to rent low as it's easier to get stuff leased and their cut doesn't change that much. However, in this market I don't think that's really true. Supply is so far below demand that it's really easy to lease something unless you're out on cloud 9 with your prices. So I don't think a pm has an incentive to lie or downplay. But still, I would always double check and push them to try for more at least at first.

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