First Buy and Hold Deal?

Question

I am working on my first buy and hold purchase.  Seller is in pre-foreclosure and has a short sale firm helping him sell the property.

Home was built in 2009.  I had a home inspection yesterday and there's basically nothing wrong with it.  Just a couple minor repairs.  It's in a subdivision with new homes being built across the street priced in the $140's and $150's (with more square footage).

Home is 1585 SF, 3 bed, 2.5 bath, 2 car garage.

Here are the numbers:

Market value with minor cosmetic repair (paint, carpet) = $135,000

Short sale price = $110,000

Market rent = $1,150/mth

Property taxes = $1,400/yr

Insurance = $700/yr

Maintenance/Repair/Capex = $1,500/yr (I'm thinking this is pretty conservative given the condition of the house, but let me know if you guys think otherwise.)

HOA = $480/yr

Vacancy = 10% (This one makes me a little nervous because there are a good number of other SFHs that are rentals in this area.  American Homes 4 Rent has been very active in this area.  I ran the numbers on rentals on MLS in the immediate area and the average days on market for similar properties was 56.)

Mortgage = $459 (conventional financing with 20% down)

I would do property management myself.

With these numbers, cash flow is >$200/month.

What do you guys think?  It is nowhere near the 2% rule, but nothing in my market (Raleigh, NC) will come close to that (at least not in any areas that I'd be interested in).

My other thought is that I would be getting it at enough of a discount that I could possibly do a "paint and carpet" flip.  I'd rather buy and hold if the numbers make sense, but the vacancy factor seems like a bit of a wild card, so I'd like to have another exit strategy.

Thanks in advance!

Chris Stromdahl · Answer

Do you have to put down a down payment?

I am not a short sale/pre foreclosure authority on any level, this is why I ask.

I did not calculate your numbers, but it has been my experience from reading other deal analysis posts that if you are satisfied with you Cash on Cash return, then the deal looks good.

As for the 2% Rule, it is a solid guideline, but it should not be the sole basis upon which a decision is made. I calc the 2% Rule for approx 300 properties in my local market and discovered that there is a direct correlation between it, positive cash flow and of course, ROI. Pretty interesting actually. For my analysis, it was right around .9% that cash flow started to be negative.

Check this out: http://www.biggerpockets.com/renewsblog/2013/04/14...

Good luck.

Dawn Brenengen · Answer

@Chuck Hollowell You should still be fine in the fall.  The only time it gets really hard is November/December, during the holidays.  Although the best time of year is definitely spring and summer, and people do try to move when kids are not in school, it's not a rule. Just see what else is on the market at the time you want to rent, and price accordingly.

Tom Dupree · Answer

I would target an 18 month lease if you are trying to move to a summer lease expiration / renewal (would be Summer 2016).

Does USAA insure if the lease goes month to month?  I'm not eligible for USAA but have heard great things about USAA ... but if you always have to be in a 1 year or longer lease that might restrict your options.

Chuck Hollowell · Answer

@Dawn Brenengen

@Mike Ritter

Thanks for the feedback!  I'd love to hear from any folks familiar with the Raleigh rental market about how hard it will be to rent this house in late fall.  If all goes according to plan with the short sale, we would close in October or November. I'd need a little time to get it cleaned and ready for tenants. So, I'm concerned about trying to find a tenant at that time of year. Thoughts or experience?

Also, what's the best way to get the lease term onto a schedule where it will turn over in the summer?  The insurance quote I got from USAA does not insure rental property for leases less than one year (I can get another quote if needed).

Thanks!

Matt Morgan · Answer

What are your minimum return requirements? If you factor in closing costs and the new paint and carpet, you're probably eeking up close to 30k invested and based on your numbers receiving $200/month in cashflow, which equates to less than 10%. I think there are better investments out there, but you may be comfortable with this.

Also, short sales can take a long time to close, assuming the bank even accepts an offer of 110k when ARV after light rehab is 25k more and houses across the street are selling for 150k.

Phillip Hunt · Answer

Hi Chuck,

My only comment is, what are you waiting for, I would jump on this in a second.  If you want a long term, money generating asset, with a large potential for it to increase in value over time.  Do it.

I have three income properties that I rent.  If the positive cash flow equals 10% annual return on the cash I have into the property I pull the trigger.  And, that does not count the principle the rent is also paying for me.

If it was me I would jump on this.

Dawn Brenengen · Answer

@Chuck Hollowell I wouldn't buy in that area for a flip, but if you plan on buying and holding, it's probably a fine deal.  I don't think you will have vacancy issues if you have a well-kept, nicer home.  Homes, if listed too early, sometimes skew the days on the market.  I would budget some for capex, but with a newer home, I wouldn't add too much.  Just figure out the larger systems in the home, a schedule for replacement and typical costs for replacement, and then turn that number into a monthly figure and add it to your expense list.

Mike Ritter · Answer

@Chuck Hollowell

I just rented a house for a client around the same area off of Hwy 401 near Garner for $1100 per month.  3bd, 2.5 ba 2 car garage. It is older than the house you are considering and I had to get the interior painted.  Painting really helped and had two applicants right away. I would say we had at least 50 calls and 75 emails about it so there is interest in this area.

Bill Jacobsen · Answer

I would want to look at this as a pure investment.  That means I would put in management costs even if I was going to manage.  At 10% that would mean an extra $115 per month in costs.

I think the house which is 5 years old would be hard-pressed to compete with larger and newer houses.  Maybe the amenities and more mature landscape would help.  I wouldn't want to buy with the intent to flip.

I also don't think the cash flow is there for a house that costs $110,000 + $5,000 to $10,000 for rehab.

I think your maintenance/Cap. expense budget is OK.  I budget $2,000 per year on average on a house that size.

Good Luck.

Bill

Chuck Hollowell · Answer

@Dawn Brenengen I've written off the 2% rule for the Triangle market (at least for the areas I'd be comfortable investing in). Yes, this is SE Raleigh, but not the sketchy parts. It is close to Garner in one of the newer subdivisions. Thoughts on vacancy issues there?  Or the amounts I've got for repairs and capex?  I think I'm likely being pretty conservative there.

@Chris Stromdahl yes, there would be a 20% down payment.

I've run these numbers through a couple different SFH rental spreadsheets and the BP calculator. But I'd love to get a check on any of my assumptions from folks with more experience. Thanks!

First Buy and Hold Deal?

Most Popular Reply