First Potential House Deal

Real Estate Deal Analysis & Advice
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First Potential House Deal

Kevin R.
Conway, AR · Member since 2012 · 6 posts · 1 vote

Hello, I am pretty new to the forum, but I've lurked for a while. Let me tell you my goals and then a bit about a potential deal.

I want to buy a rental home to hold. I am concerned primarily about building a nest egg of equity for my retirement in about 25 years (with tenants paying for the equity). If this goes well, I'll buy more and keep at it.

I have no interest in making a career of this, I already have a career that I love.

So I have the opportunity to buy a house. The asking price is $79,900 and I anticipate I could probably get it for $73-75. But let's pretend I am buying it for a straight $80k. The house is in foreclosure and sold for $95k about five years ago. It is in really good condition and is only about 6 years old - it will probably need about $300-500 in touch ups to get it to local rental standards.

The property tax is $850 a year. Insurance is $625 a year. I will manage the property myself.

I am putting $0 down and getting a 2.5% loan amortized at 20 years so my P&I is $413. It's a private party loan, the property will not be encumbered and so to everyone but myself and the lender it is a cash sale. It's a family thing - the lender isn't in it for the money but to help me out.

The property will rent for $750.

Do you think this deal matches my goals?

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Jodi Slocum
Bentonville, AR · Member since 2013 · 12 posts · 1 vote
12y

We're in the Northwest Arkansas(Bentonville/Rogers) area and those numbers are close. Some examples that we've encountered in the last year while exploring up here are:

Purchase price 76k, mortgage 450, rent 975

Purchase price, 62k, mortgage 350, rent 1125

Purchase price 90k, mortgage 550, rent 1200

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  • Scott E.
    Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
    12y

    Welcome Kevin

    There are a couple of guidelines that most around here use for rental properties that I'll share from my reading. I hope this helps.

    1) The 2% rule. Under this rule, your gross rents should be 2% of the purchase price. Under this rule, an $80,000 property should rent for $1,600 / month

    2) The 50% rule. The short rendition of this one is that you should allocate 50% of your gross rent for expenses(property management, repairs, vacancies, evictions, etc). The rest goes towards mortgage payment, and the remainder is net profit. Under this rule, you're -$160 with your property.

    Both rules are very conservative, but help to limit your risk exposure.

    I would keep searching for a better deal that cash-flows more in line with one of these suggestions.

    Best of luck in your investing!

    0Reply
  • Kevin R.
    OP
    Conway, AR · Member since 2012 · 6 posts · 1 vote
    12y

    Thanks for the reply. It is impossible to get a 2% of purchase price for rents in my market. I have talked to three friends that are landlords and they consider 1% to be good. One told me that he rarely gets to 1%. We are in an area with one of the lowest costs of living in the country.

    Does the 50% rule apply if there are no management fees - I would think it would be more like 40% if you are self-managing?

    Also, since I am primarily interested in the equity in the house 25 years from now, I don't need cash flow beyond what I would need to maintain the property and cover vacancies and evictions (I won't need a lawyer for evictions - I've been told it's crazy easy to evict someone in Arkansas). With that in mind is the 50% rule applicable?

    Also, regarding expenses, Arkansas has some of the most landlord friendly laws in the country. Tenants take properties as-is and a landlord has no obligation to repair anything that isn't explicitly spelled out in the lease (if something is not up to code the tenant can complain to the building inspector). Obviously on a buy and hold you would want to keep the place up, but for instance, if the dishwasher goes out, I wouldn't have to repair or replace it unless I wanted to do so to keep the tenant happy. In fact, Arkansas is the only state with no implied warranty of habitability. Of course, I have no interest in being a slum-lord and plan to maintain my property. My point being that in some instances, it will be the tenants responsibility to do repairs and maintenance and I would think this would improve my margins some.

    Oh, and I will not be paying $80k. The place needs quite a bit of work so I'm looking at a $65k purchase price now.

    1Reply
  • Justin Cooke
    Investor · Wichita, KS · Member since 2013 · 27 posts · 2 votes
    12y
    Kevin R. I agree with your referenced landlord friends - I haven't seen anything close to 2% rule for SFR in my part of Arkansas. May be available in war zone areas, not sure. 1% rule is attainable and that's what I shoot for. Your numbers sound pretty much in line with SFR properties I've evaluated in Arkansas. With such attractive financing terms it seems like the deal could be inline with your goals and with little out of pocket upfront great cash-on-cash return. With $75K initial (purchase + repairs), self-managed, 8% vacancy factor, 10% of income for maintenance I'm coming up with around $100/month cash flow.
    0Reply
  • Kevin R.
    OP
    Conway, AR · Member since 2012 · 6 posts · 1 vote
    12y

    Thanks Justin, it's good to hear the perspective of another Arkansan. I have zero cost basis as everything in the loan - zero down and I'll finance any repairs too. Just for fun, I put $1 of my own money into the deal and calculated an annual cash on cash return for that dollar of 127,375.21%.

    I figure if it cash flows $1 a month it's a free dollar for me (with a bunch of other free dollars in equity in the house). Obviously there is work to do, so it's not REALLY free money. If it cash flows $100 that's gravy.

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  • Michael Wentzel
    Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    12y

    @Kevin R. The great lending terms might make the deal work. Is your family willing to do more loans for you on those terms? Otherwise, you might have a hard time building much of a portfolio with the numbers you're looking at.

    If you don't want another career (job) I would factor in the 10% of monthly rents for property management. Maybe you don't want it now, but if you are looking to build a portfolio of properties, the management will eventually become a second job.

    And if you're willing to us a property manager, it might open up other markets farther away with better numbers. Some people like to stay close to home. Others are willing to build a portfolio from distance if the numbers make sense. That's up to you.

    Good luck. Rental properties as part of a your retirement strategy sounds like a good plan. I'm self-employed (not in real estate), so real estate is a big piece of my retirement plan.

    Mike

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  • Kevin R.
    OP
    Conway, AR · Member since 2012 · 6 posts · 1 vote
    12y

    @Michael W. - Thanks for the reply. I don't anticipate another loan with such favorable terms. (I think I just figured out that @ business).

    Any future deals will need to be using more traditional bank financing.

    This is a "trial house" to see if this is even something I want to be involved with. My career gives me a TON of flexibility and my wife is a stay at home mother. This area also seems to have a lot of long term tenants so hopefully we won't be churning tenants too often. I don't mind a second job, I don't want a second career - if you catch what I mean.

    At the end of the day this ALL about tenants buying me equity in homes.

    0Reply
  • Kevin R.
    OP
    Conway, AR · Member since 2012 · 6 posts · 1 vote
    12y

    No, I guess I didn't figure out how to accurately @ someone.

    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    Man. Do your family members want to take on any surrogates they'd be willing to lend for?? ;)

    Good luck!

    0Reply
  • Raymond B.
    FL · Member since 2009 · 2k+ posts · 357 votes
    12y

    @Kevin R.,

    To make the @ work, do the following:

    Hold down the shift key and type the @?

    Look below this Window, and you will see a list of people who have contributed to this post.

    Click on the name of the person that you want notified via an email, that you responded to them.

    Raymond

    0Reply
  • Matt Looney
    Investor · Little Rock, AR · Member since 2013 · 50 posts · 40 votes
    12y

    @Kevin R. , it's great to see another Arkansas on here. I'm in the Little Rock area myself. If you eventually decide that additional rental properties interest you, I can keep an eye out down here. Or if you need additional boots on the ground here in the metro area just to take a look at something for you I'd be happy to help. Good luck in your investing!

    0Reply
  • Jodi Slocum
    Bentonville, AR · Member since 2013 · 12 posts · 1 vote
    12y

    We're in the Northwest Arkansas(Bentonville/Rogers) area and those numbers are close. Some examples that we've encountered in the last year while exploring up here are:

    Purchase price 76k, mortgage 450, rent 975

    Purchase price, 62k, mortgage 350, rent 1125

    Purchase price 90k, mortgage 550, rent 1200

    1Reply
  • Michael Lauther
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    12y

    @Kevin R. your family is giving you a valuable opportunity , when evaluating this investment consider the merits of it without taking into account the leverage as this will be available on any investment you make. Look only at the potential for this property versus other opportunities in the area. You have no financial skin in the game but the relationship of the family member who wants to help you is more valuable than any dollar amount you may wish to invest

    Regarding the 50% rule, you would be surprised and outraged at the damage tenants can do besides not paying rent. Vacancy and vandalism can be a lot more costly than anticipated so make sure you have sufficient reserves.

    Best of Luck to you.

    0Reply
  • Jamie Atkinson
    Rental Property Investor · Rogers, AR · Member since 2014 · 50 posts · 32 votes
    11y
    Originally posted by @Jodi Slocum:

    We're in the Northwest Arkansas(Bentonville/Rogers) area and those numbers are close. Some examples that we've encountered in the last year while exploring up here are:

    Purchase price 76k, mortgage 450, rent 975

    Purchase price, 62k, mortgage 350, rent 1125

    Purchase price 90k, mortgage 550, rent 1200

     @Jodi,

    Are you still seeing these kinds of deals? I'm looking hard in Bentonville/Rogers, and only seeing rents around the 600-900 range and SFHs in Rogers for 70K, duplexes in Rogers for 120-150k and SFHs in Bentonville for 80k, duplexes there for 170-200k.  Please tell me what I'm doing wrong!

    0Reply
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