First Deal for rental home in high appreciation area of Atlanta

[Luke Woodruff]

Hi Bigger Pockets community! This is my first post but wanted to get some feedback on a deal my brother and I are working on in Atlanta.

My brother is a mortgage broker for a firm in town and we have an opportunity to buy a pre-foreclosure property from another, unrelated fund within his firm. I am a commercial eal estate appraiser who works on medical properties (hospitals, medical office buildings, etc.) I do not appraise residential properties so no conflicts of interest there.

The house is located in Decatur but not in the best part of Decatur (south of downtown). Here are the details:

Purchase Price: $139,000. The property has been appraised twice in the past 2 months for the firm at $200k and $195k.

The plan is I would purchase the property with $5k down in a higher interest bridge loan. We would then get a new appraisal and refinance to a conventional loan with the acquired equity.

Monthly rental rate: $1,400

Using expenses of 8% vacancy (1 month), 10% of EGI (management fee), 2% of EGI (reserves), $100/month (repairs), insurance of $732/yr (quote from state farm) and real estate taxes of $3,440/year (just tripled this year but can't challenge until next year)

This results in a NOI of $8,229 and a cap rate of 5.92%.

Mortgage at 4.5% would be a month payment of $678/month ($8,147/year) which leaves a small cash on cash return of 1.64%.

The numbers aren't great but I do believe this will be a high appreciation area in the next few years as more and more people move back closer to downtown in Atlanta. Our plan is to hold the property for 4 years and sell if the time is right. I feel inclined to do the deal as long as it can cover it's costs, which it barely does currently. However, we can appeal the tax assessment next year and have a good chance of getting those lowered which would help the numbers greatly. We have also considered adding a deck on the back as it overlooks the creek which would help with resale and may help getting a higher rent.

Any thoughts or questions? Anything I am missing? Thanks!

[Moiez Karim]

Returns are very low. I'm not a very experienced investor but I don't think taking a high interest loan and betting on appreciation is a good strategy. What if you are unable to refinance later on? Even if you can, you'll be hit with closing costs again.