Potential 1st Buy- Need Deal Feedback

[Erik R.]

Hello All-

I'm still in the process of walking through houses, analyzing deals, and networking.. I have not yet pulled the trigger on my 1st property. My current approach is to run analysis on properties which are coming to me off the MLS through a realtor, and determine a target purchase price based on est Expenses and Cash Flow. I then plan to place offers based on calculated target price, and through the inspection period verify my assumptions through Contractor and PM walk throughs.

Below is a recent listing that I'm contemplating making a low offer on based on a walk through yesterday, and would appreciate any feedback:

Property is in a C+ area (For those Metro Detroit investors, West Dearborn), and is Bank Owned. 3BR, 1.1 BA, 1,164 Sq Ft

Asking price is $64K. Comps show estimated $70k ARV. (not sure why such a large gap..)

Est Rent based on comps = $1,050/mo (rent/asking price ratio = 1.6%).

Gross income = $11,466 (assuming 9% vacancy loss) annual

Est initial Expenses: $15K total

Property requires the following est 'rent ready' improvements: New carpet in 1 room, new back doorwall, main floor bathroom updates, new fixtures, paint, etc..

No central AC; I calculate based on comps I could get $100/mo. more with AC.. est $3-5K

Additional initial expense risks: Water seems to be leaking through cinder block foundation in 1 spot... no idea how much this would cost to repair/mitigate.

Furnace looks very old; city winterization report shows it was functional, however no clue how much life is left...

Recurring expenses:

Taxes/Insurance- $4,450 annual // $379/month

Variable cost PM (10%), with 9% vacancy loss-  $96/mo

I assume $500 annual expense/repairs plus $100/mo in reserves

I assume $300 annual advertising/admin expenses

Total annual recurring expenses = $6,592

NOI = $4,874

In order to net $200/mo cashflow with PM (my own arbitrary target for my market) and yield >9% cash ROI, I need to purchase this property for $45K, assuming a 30yr, 20% down mortgage.

This property would yield (with PM): $215/mo cashflow, 9.75% Cash ROI, 11.79% Total ROI

This property would yield (without PM): $310/mo cashflow, 14% Cash ROI, 16% Total ROI

Final rent/price ratio would be 2.3%

thoughts ?

[Theodore B.]

Hello Erik congrats on looking at your first deal both exciting and freaking terrifying at the same time here are some of my thoughts and they are just that my thoughts take from them what you will.

Area- Good area, and good size house. My first question are you looking to wholesale, flx and flip or hold the property?

The central air is nice but being in a C area when and if your unit is vacant how sure are you that you won't have the unit stolen. 

If you have a leak on your foundation, may not be anything too serious, basements leak in Michigan, however if you look around the whole basement wall and you see large cracks then I would worry about foundation issues. You can fix the grading around the property to assist with lessening the leak, but of course that won't be free and with the weather getting ready to change it would be something to consider

So if you need to replace your furnace, look at about $700 bucks to purchase and install, better to be safe than sorry especially when the winter hits..Now what you can do is risk it, see if it works and sign up with DTE for their Monthly core protection plan at about 16 bucks a month, if the furnace goes out and they can't fix it they replace it. you could save some money there. 

Taxes..WOW  that is a lot, my rule of thumb is to not exceed 2K in taxes, granted I don't have properties in Dearborn and I know the taxes are higher there, but if I am going to pay that much in taxes I will need to be in a C+ to B or better area. those taxes are KILLING your cash flow!

Property management...I would say scratch that, you live in Michigan, if I can manage properties 3000 miles away here in Cali, I know you can do it in Michigan. For one property it would not be worth it.

Your annual expenses I agree are low, but if you rehab the property right the first time you should be good for the first year or so and of course you screen the tenants

Annual expense for advertising and admin expenses, seems okay, I would advertise on craigslist for free!

Final thoughts, if you go a few blocks over you are in Detroit and you can get a property for a lot cheaper and heck may be able to get a rent for about 800 a month. Just some food for thought, People will often times use Detroit as a punching bag but I say if you have not tried it don't knock it, heck I have and do try it and I praise and curse it a the same time, but that is with any market if your dealing with tenants. 

All in all I wish you all the best!