Is this a good first investment property?

Question

I am a new real estate investor.  I met a guy today that is closing out the estate of a family member.  He has a 1 bedroom house near Peoria Heights, IL that he needs to get rid of. The home is very solid and just needs some minor painting for updating.  Newer furnace, new central air, roof in good condition.  Full basement that could be finished to add another bedroom.  No garage.  Small yard.  Price will be at or under $30,000.  I believe it will rent for $575-600 after painting some carpet replacement.  Taxes are $1,200. I figured insurance at $35 per month based on my agent's estimate on a simpler property and vacancy, cap ex, repairs at 7% each or $40 per month.  I included the same $40 per month for property management even though I will self manage at least until I can locate more properties.  I recognize that is low but wanted a placeholder for management.  I would pay cash for the property and estimate around 10% cash on cash ROI and cash flow around $275 per month.  This seems like a low risk, safe first investment.  I recognize that the property would be a little hard to sell at a later date but I think I am getting it $10,000 to $12,000 under current market value.  I would be very interested in everyone's thoughts on if this is a logical starting point for a new investor interested in buy and hold investing?  I have substantial investing experience in the stock market but have been shocked at how hard it has been to take that leap and buy my first investment property. Thanks in advance for your input.  Greg

Matthew Brill · Answer

@Lauren Baker

Yeah, I get that. I'm not necessarily saying that this property will fall into Ben's "lipstick on a pig" type even if the true value of it is $40. He will hopefully have extra equity built in to the deal but the difference between a $30k and $40k house market wise may not be anything. Still something that has to be considered in my opinion.

Matt

Greg Myroth · Answer

Thanks all. I appreciate the feedback. The cash on cash ROI is an estimate from the Bigger Pocket calculator so it not just a guess.  But It is an estimate at best.

Jeremy Tillotson · Answer

@Greg Myrothas you already know it will be a rental and hard to sell a one bedroom, may look into adding 2 bedrooms and a bath if you have enough ground.

Christopher Zito · Answer

At worst case you will learn some lessons at a relatively cheap cost. You will be getting some cash flow, and your initial out of pocket will not be that high, (Not that I am poo pooing 30K). You will have an opportunity to decide if this is the market you want to be in, and if you even want to be a landlord, or focus on other aspects of real estate.

I have always felt that with real estate you can read and listen to people all you want, but when you buy your first property is when you will learn the best lessons.

Greg Myroth · Answer

@Lauren Baker @Matthew Brill @Wilson Churchill

Matthew, I think you are right it sort of does fall into "lipstick on a pig" in some respects.  I don't ever see the house greatly appreciating although the area has some potential long-term (but that's pure speculation). I do feel like the purchase at 75% or less of current retail would give me some equity and overall there isn't a lot of downside to the property or the area in my opinion.  I think at worse it is a long term stable area with limited appreciation but I don't expect depreciation.   I totally get what Ben Leybovich is saying and I tend to agree particularly as it related to depreciating C class neighborhoods which this certainly is near. I am hoping with good tenant screening and a good solid home I can minimize those "lipstick on pig" issues and tenant hassles that go along with them.

Lauren, that is a great idea and that is why I feel like this property is a good starting point for me. Low initial investment that I can make some minor improvements to and rent without feeling like I have a ton of money tied up into it.

Wilson, Yes the taxes are really high.  They went from $400 per year to $1200 per year. I am assuming because of an owner homestead exemption and senior exemption both of which I don't totally understand yet.

Wilson Churchill · Answer

It sounds like it should have a positive cash flow. The taxes seem high at $1,200 for a 30k house, so that will affect your annual numbers.

You should be able to make a few grand a year by renting, or you could offer an option to buy at 40k after a year or two and roll the total profits into another deal.

Lauren Baker · Answer

@Matthew Brill, I think @Greg Myroth is saying that the cost of the house is $30,000 not the value. I listened to a podcast with Ben Leybovich the other night, and he is saying that houses only worth $30,000 should be looked at with caution.

Greg, I would suggest looking into what houses like the one you are looking at are worth in your area. Then you can figure out with all the updates if it will be worth your time. I'm in a similar situation trying to figure out what my market is like.

Best of luck!

Lauren

Matthew Brill · Answer

There is a group of people out there of the Ben Leybovich mindset that throw caution at the $30000 properties. There are plenty of posts out there regarding this exact issue. I'm not sure which camp I fall into but I'll bring it up just for you to think about it. The issue becomes centered around your specific market and the type of home it is and tenant it will attract. I don't know anything about the Peioria Heights rental market but the argument would be that a $30k home will be a "class C (or less) neighborhood" and while you may see good cash flows and rent at the 2% rule, you'll see higher turnovers, maintenance costs, and capex which will ultimately catch up. On the same subject, people in this mindset believe maintenance and capex should be calculated as flat costs based off of square footage or experience in a market rather than a percentage of rents. You are in a good starting position with capex given the recent upgrades. It may also be worthwhile to call around some local property management companies to find out about neighborhood, potential tenants, and property management fees as 7% may not be conservative enough. Again, im not  saying you don't have a deal, just some things to think about to help with due diligence.

Best of luck!

Matt

Frank Eimiller · Answer

I would definitely look into it more if you haven't already-- sounds pretty solid to me given all of the newer updates

If you think you can get it rented and can make sense of the numbers (which it sounds like you have!) then you've already answered your own questions ha

Is this a good first investment property?

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