Help me analyze this property. Should I jump on this opportunity?

[Harrison Davis]

Hey everyone,

Context:

I am looking to buy my first investment property. Over several years, I have worked hard to save up for a down payment, and I currently have $200k set aside in a money market account ready to be put to use. I have been waiting for a good opportunity, and I came across something intriguing. There is a seller that needs to sell his rental property quickly (within ~45 days) as part of a divorce agreement. It is a townhome built in 2017 in a family-friendly, growing area, and it already has a tenant living there. The tenant has been reliable and has a track record of paying rent on time, and he is also motivated to find a buyer so that he doesn't have to move.

Cash Flow Calculations:

Estimated property value = $590k. The seller is asking to sell for $565k if they can sell it without listing it and forego the agent commissions. However, I think this number could come down even lower after negotiation. Let's call it $550k purchase price.

Rent = $3,100/month

Mortgage: Given that I have $200k set aside, let's assume I put 35% down ($192.5k). Assume 8% mortgage rate and 30-year term. Principal & interest = $2,623/month. I have a strong credit score and expect I would be able to get approved for this mortgage.

Monthly taxes = $155/month ($1,860 annually)

Annual insurance = Estimated $166/month (~$2,000 annually)

Annual HOA = $196/month ($2,352 annually)

Maintenance = Estimated $250/month ($3,000 annually) (0.5% of property value given that this is a newer build. Am I off base in that assumption?)

Vacancy: I know it is prudent to be conservative with vacancy, but I have confirmed with the tenant he wants sign a lease for a minimum of 2 years and potentially up to 5 years. With this in mind, I assume vacancy for the first 2 years would be zero. I would plan to sell this property when the tenant is no longer ready to renew. Let's assume 2 years on the conservative side.

Property manager: I would manage this myself.

Net income (monthly): -$290/month. NEGATIVE cash flow. I have a separate, steady full-time job that would allow me to take on the negative cash flow every month.

Note: The home is already 100% furnished, so there is no need to buy furniture.

Appreciation and Loan Pay-Down:

I would offer $550k as the purchase price. The property is worth $590k already. I think it is reasonable to assume 4% annual appreciation in this area, which means after two years, the property could be sold for ~$635k.

Based on the terms of the mortgage, ~$351k will be remain on the loan balance after two years.

Equity after 2 years = 635 (purchase price) - 351 (loan balance) = $284k. In essence, after two years I would have turned a $192k down payment into $284k equity (minus agent commissions and closing costs).

Net proceeds after selling = $284k - $38k (6% agent commission) - $5k (estimated closing costs) - $7k (cost to hold for 2 years w/ negative cash flow) = $234k

After selling the property, my plan would be to roll this equity into other investment properties through a 1031 exchange.

Questions:

Is this a good opportunity? Should I pursue this as my first investment property? Am I missing anything?

After running the numbers, this deal is clearly a value/equity play, not a cash flow play. It will be negative cash flow, but does the equity created by buying at a discount make it a good investment? I am weighing this option against investing in an S&P 500 ETF in the stock market (historical 10% return).