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.

[Patrick Drury]

@Markus Samuel
I didn't see it in your post. Do you know what the ARV is? If you are doing a value-add deal this is something you want to keep top of mind. In terms of is it a good deal that is completely subjective. It depends on what you are looking for from the investment and what your expectations are which I didn't see above. To a buyer looking for a turnkey deal, a BRRRR isn't a good deal, and to a flipper, a turnkey deal isn't a good deal either. It's not that there is anything wrong with BRRRR or turkey deals it's that they don't fit that particular buyer's criteria and expectations for the investment

[Travis Timmons]

I've seen the way that this movie ends, and it's usually not good. Out of state buyer, first time investor scooping up a cheap property that needs a lot of work in an economically depressed area. You're going to need a far greater return to justify the risk and hassle factor on this one. 

You can make mistakes in areas that have a growing population, solid economic trends, and higher rents. In a location like this, you kind of have to nail it. The tailwinds of appreciation are not going to bail you out. My first investment was not a great one, but rents increased from $1200 to $1900/month in a few years. It turned into a solid deal with rent appreciation. I don't see that happening in a place like Horn Lake, MS (I know nothing about that area but am making some assumptions). 

[Paige B.]

A suggestion I have would be to get insurance quotes while analyzing your numbers. Our insurance here in Mississippi has shot up recently and is killing a lot of cash flow, at least here in the South. 

[Todd Anderson]

Markus,  I agree with what many others have said.  

I think the most important thing that you had in your Cons is location.  The investors that I work with that invest out of their area are most concerned in the projected area appreciation.  If you invest into an area that has strong growth and good employment numbers it can overcome many other Cons.  This will make the property appreciation obvious.  

there are many properties that you can make work but if the area is not growing you are going to miss out on one of the most important money makers in Real Estate, Appreciation.  

There are too many good markets to invest in poor markets.   

[Cole Farrell]

Hey Markus! 

Congrats on getting in the game. I don't want to be the bearer of bad news but I truly believe starting with a single as a rental is a major mistake. When the tenant leaves or there is an eviction, you will be stuck footing all the bills with a low likelihood of recovering it. It is always better to start with a multi-unit 2+ so that if something goes wrong, you still have one tenant to cover necessary expenses (mort, taxes, insur, etc).

Also, major renovations are not a great idea for starting out as others said, especially out of state. I would highly suggest starting with a rougher but livable/rentable multi so that you can learn and make money without all the downsides. Start with one unit rehab and then the next once that is rented.

Good luck!

[Jordan Ray]

Quote from @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

Hey Markus! Was great chatting with you earlier today over zoom and I believe I helped you understand this property and the location and how to analyze this property from many different angles but unfortunately we discovered after looking at your deal that its a NO-GO and you will probably need to back out, if possible. I look forward to earning your business and helping you find a better properties with better numbers. Looking forward to our main call on Friday!

[Markus Samuel]

Thank you everyone for all the perspectives and insights! It helped me put my gut feeling into words.

@Patrick Drury 
>I didn't see it in your post. Do you know what the ARV is?
The ARV is estimated to be 170-180K

> A suggestion I have would be to get insurance quotes while analyzing your numbers
Thank you @Paige B.for the advice and I'll keep that in mind!

@Cole Farrell > Congrats on getting in the game ...start with a multi-unit 2+
Thanks, and I agree with you! I'm a big believer in Multifamily and definitely in my medium-term plan. My plan currently, is to start small with high cash-on-cash returns to learn and build equity, then re-invest in bigger properties. I was told it's more difficult to find tenants for smaller multi-units(duplex, triplex, etc.) due to compatibility, but I'm not sure how accurate that is.

@Jordan Ray it was great chatting with you too! I appreciate your fast reply and taking the time to go over the deal with me!
Looking forward to exploring the potentials and the opportunity to collaborate! 

[Marcus Auerbach]

Why? And why Hornlake? Its a 3 hour drive for you and then you have to hire a PM to manage!

The population is almost half of what it used to be 2010, property values are going down, median home prices -1.5%,..

You are making the classic nooby mistake looking at cashflow as your #1 criteria. Real estate is not particularly good at cash flow (that's what a business is for). RE's super power is equity over time. And you are picking a location that totally disables the #1 reason why you should buy real estate.

If your first deal goes bad, there will never be a second one. Jackson is a much better market at quick glance, the metrics look much better. And you can self-manage, which you should absolutely do for both your cash flow and your education!