Seeking advice on my first deal (Single Family Rental)

[Markus Samuel]

I’ve found a “deal” but I’m having trouble understanding if this is a good fit for me. I’d love to hear some perspectives from more experienced and local investors on what you think about the numbers below:

$130k for 3bd 1ba for a single family house:
- Reno Budget: 42k
- Projected Rent: $1400

Pros:

1. 1. Currently tenanted 
2. 2. Appraisal came ~10 higher than PP
3. 3. Potential for ~7.5% cap rate

Cons:

1. 1. Long distance investment (will be using property manager)
2. 2. The house needs heavy renovations
3. 3. Located in HornLake, MS – I'm a bit concerned about declining population and overall economic drivers

[Jared Smith]

@Markus Samuel here are my thoughts. With this being your first property it could be a big bite to take. However, if you know and have a relationship with the person/team that will be doing the rehab for you in your absence and trust they have your vision in mind then you are in a better place to start. 

We have properties in the Memphis Metro area, Lakeland/ Cordova, which are much different than other parts of Memphis and North Mississippi. I am not familiar with Horn Lake and the economic conditions you mentioned as a CON, but if you already have those concerns, on top of a large rehab, which typically don't shrink as you get started, and being OOS and needing a PM team, you may want to consider other options as you get started. 

Other options could look like a property closer to you or in an area you are more familiar with, could be turnkey options with an established company, could be partnering with someone to gain some experience. 

Let me know if you want to hear more about some areas that we work with buyers on through the mid-south. Areas like Memphis, Little Rock, Dallas/FTW, Houston, OKC, Tulsa, St. Louis, and various cities in AL. 

As a note, residential properties typically are not evaluated with cap rates, but I think you may have been saying a 7.5% cash on cash return or ROI. Usually only commercial properties with established operational expenses histories are evaluated by cap rates and then those cap rates can also be applied to buildings in certain areas representing higher or lower risk areas. The higher risk an area is the higher the cal rate would be. Good for your account in theory, but you really need to understand what is driving that cal rate for that area before purchasing a property.