First investment deal analysis (rental property)

[Omer Husain]

Hello BP! If I end up purchasing this house, this will be my first investment property! I would like the experts to give their thoughts on this deal. SFH, 3/2, single story, built in 1982. This will be a buy and hold.

Purchase Price:  105K

Estimated Repairs:  3K (the house is basically move in ready)

ARV: 115K (according to the comps)

Down Payment:  20% (21K)

Closing Costs:  2.5K

Gross Monthly Rent:  $1300 (according to the comps)

Operating Expenses:  $541 (beats the 50% rule)

Mortgage:  $425

Cash Flow:  $334

CoC ROI: 15.10%

I know the purchase price is pretty close to the market value, but the cash flow and CoC ROI seems attractive. Property is located in the NW area of Houston. I did not factor in anything for property management since I will be managing it myself. Am I missing anything else as far as the numbers are concerned? Thoughts please?

Omer

[Steve Rozenberg]

I think as an investor I would suggest going a little deeper in your thought process, you should start with your end in mind. Meaning what is your goal with investing? Is it to have immediate cashflow, appreciation, depreciation, equity capture etc... there are many ways true investors look at deals. Which I will confess when I started buying investment homes myself I never did, if it looked like a good deal because of cashflow then we bought it. That basically ended up getting me 70% of my portfolio in lower income area and also a 52 unit complex in 3rd ward of Houston (DONT DO THIS APPROACH )

So when people are asking if this is a good deal and everyone is giving advice (which all is very good and you should listen to it) you need to see if it matches what your 5,10,20 year plan is. Most people get into this and have no plan and that is a recipe for disaster, have a plan / goal then come up with a strategy for that goal. If you are looking for certain cash on cash return, with homes in a certain area then you come up with your formula. After you have this formula then when you see a deal you just see if it fits your formula for your end goal. Asking people if this is a good deal reminds me of that movie "Planes , Trains , and Automobiles - Your going the wrong way, how do they know where were going?" (That could be dating myself). The point is if no one knows what your goals or plans are how would they know if its a good deal.

A property in the heights or Oak Forest would never compare in these numbers but that is a speculation play. This is more to me of a cashflow and appreciation play. It depends on what your goals are .

Spend some time and come up with a goal and a  plan before you start buying and buy a mistake like the many I personally did because no one gave me this advice first.

Also you mentioned your going to self manage, I used to self manage myself. I will disclose I now own a company that manages over 500 homes here in Houston. One thing you want to factor in which a lot of new investors do not is the value of your time, make sure you protect your time and what it costs you dealing with your property. Time is the only thing you never can get back and while learning on the job sounds fun and cool sometimes, If you are going to do this I would advise you to learn the laws that govern you. Fair Housing, Discrimination, Texas Property Code etc.. Landlords are the highest sued in real estate because of lack of knowledge in this area and its not because they are dumb or do something on purpose wrong. Its because they do not take the time to learn the many many laws (and yes I can check off that box that I was in a law suit early on with a tenant, by letting her slide on her rent and then trying to evict her I was told by the judge that basically I violated the contract first and could be brought up in legal matter of discriminating against my other tenants since I did not let them ALL slide) that could have been a very very expensive lesson, a lot more then what a property management of just a few dollars per day cost me. 

I agree that you should either factor in property management in the cost acquisition, not saying you have to use them or factor in legal lawsuit money because that is a very high probability if you try to learn as you go in this environment here in Houston.

Just my opinion for what its worth.