I think I found my first deal!

[Mike Landry]

I think I found my first deal in Kingwood (Houston area).  Long story short:

An old friend of a friend bought this house in 2007.  Lived there for a couple of years got married and moved.  He paid $124,000, tried to sell it in 2010 ish for $117,000 but couldn't.  So he gets a management company and ends up renting it out for $1300 per month.  He makes good money at his job pushing 200K so he's not interested in the rental property business.  So I go out last night and have a few beers with him and some others and I mention that I'm looking at buying rental property and ask how his is going.  He immediately says he will sell his for $117 and jokes about a "verbal contract".  I tell him I am very interested and will run some numbers and get back to him.  I also mention that we can keep realtors out of it to save him %6.  

Here is what I can tell about the property.  1700 sq ft 3 bedroom 2 bath.  built 1980.  Tax appraisal for 2014 is 117,500.  There are currently only 2 active homes in Kingwood listed for less than $120,000. I'm hoping some kingwood investors here can give me some incite. I grew up there but haven't kept up with the area the last 15 years.  This house is in the older section but kingwood schools/neighborhoods are high ranking.  The current tenants 12 month lease just expired and they are going month to month.  They originally wanted a 2 year lease but my buddies management company didn't want them to sign more than a 12 mo????  Do they get commission every lease signing?

My numbers:

77339

$115,000 rent $1300/mo

Gross Operating Income$15,600

Tax (117k *2.91)$3394

Insurance$800

HOA$400

MX (5%)$780

Vacancy$0

Net Operating Income$10,226

Capitalization Rate 10226/115000 = %8.89

20% down$23000

Closing costs$3000

80% loan 30yrs @ 5.5% $523/ month P and I

$523 * 12 months$6276

Net operating Income less debt servicing = $3950

Cash on cash return 3950/26,000 = 15.19%

I can't find anything that will give returns like this in the woodlands, spring, conroe area (thanks Exxon). Thoughts?

Only minor concern.  When he tried to sell it a few years ago he had a buyer that claimed there was foundation damage and wanted $XXXXX off his price.  My friend says he got an engineer out there who said that his foundation was fine.  He suspects the buyer was just trying to manipulate him to come down on price so the deal fell through.  I'll be sure to have the foundation checked out well.  

What do I do now?  I printed off a texas realestate contract.  

Thanks

[Bryan L.]

@Mike Landry 

 - I'm afraid that in your zest to become a real estate investor and get that first deal under your belt, that you may have become a motivated buyer.  It's looks to me that you are going to be paying very near full market value for this house.  And your cash-flow analysis has $0 for vacancy.  And unless I missed it, you don't have anything for maintenance, repairs, and property management.

My advice (for what it's worth) - slow down a bit.  Even if this turns out to be an OK deal, there's probably better deals out there.  And I'm not sure that this is an OK deal at this point.

Also, ask your friend for his tax returns so that you can see his expenses and income on the property.