Is this a good FIRST deal?!?

Question

Hello BP community!

I have been in my education phase for around 4 to 6 months and am an obsessive learner.  I want to transition to the next phase, which would be to put my boots on the ground.  I initially talked to a couple first circle private money investors, but turns out timing is bad with 3 of them (one isn't in a position to buy or finance after paying property tax on 90 something properties, another just finished a BRRR strategy and passed on this opportunity, and the third is being audited and my gf, which is his office manager, said it wasn't a good time and to wait until the fog clears).

I am about to make my first purchase with conventional financing, doing all the numbers by myself too, and I wanted to run it by the BiggerPockets forum to make sure i’m not buying a dud or if cash flow and ROI are actually the things i’m buying for.

This property is in a district of East Chattanooga, which is being gentrified.  It isn’t in the best area, but starting out it looks like a great cash flowing property.  Here is a link to the zillow page just to gauge map and specs of it.  The numbers I input into the rental calculator are more conservative than what zillow specifies just because I know the site isn’t the most reliable.

I’ve used the Rental Property Evaluator and Investment Calculators provided by BP.  I don’t want to get too vested in this property so I’m not blind to any mistakes if i’ve made, if any.  The property is in great shape and only needs fresh paint and interior trim.  It is also between two churches and in a very clean block.

Since I can't upload documents to this page I will give an overview.

The property is listed for $19,500.  Exterior is in good shape and so is the interior.  It needs fresh paint and interior trim.  Kitchen and bath are also in good shape.  The rehab cost i input around $2,000 just in case as a buffer.  Loan interest rate around 5% with a 20% down payment for 30 years, no HOA, Yearly Home Owners Ins around $68.25, Annual taxes at $593, saving monthly maintenance at 5%, vacancy expense at 8%, monthly Cap Ex at 8%, and I included a monthly Property Management fee like the guys say in case I hold onto this property for the longest term at 8%.  In the area I conservatively input monthly rent at $700.  With these numbers input my evaluation looks like this:

Loan amount (before down payment) = $21,500.00

Down Payment= 3,900.00

Monthly loan payment (P&I)= $94.48

Monthly HO Ins= 5.69

Monthly taxes= 49.42

Monthly Maintenance estimate= 35.00

Monthly Vacancy cost estimate= 56.00

Monthly Cap Ex estimate= 35.00

Monthly PM fee= 56.00

So my total Monthly Costs= $331.58

Monthly profit= 368.42

Annual profit= 4,420.98

Debt coverage ratio= 2.11

Annual ROI= 15.85%

and Months to break even= 75.73

Thanks for reviewing and please feel free to comment!

Luke Holcomb · Answer

@Kurtis Montgomery

Other folks in town love the cash out refi in east chatt as a way to double their money (refi out twice what they put in). I know people that do it in that area and love it. From your description I would assume that the area is around Glass St. If this is the case, I will say I love the spirit of the work going on in that area, but I don't believe it will come to fruition. If it is not in that specific area, then I would love to know where it is as we may consider East Chatt to be two different places.

Either way, in east chatt (as I would describe it) I would go with a higher return. I would also verify rents with the section 8 guidelines for that zip code. Take the table and subtract 200 or so for utilities as the table is meant to be a sort of 'all in' number for the residents. This is a good backstop, because in East Chatt section 8 most likely represents the highest rents the market will bear.

Check out: http://www.chahousing.org/s/index.php/programs/hou...

and look at the section that says, "Landlord Briefing Package (All in PDF Format):"

then click on "Click Here 2016 SAFAR Payment Standards (effective 10-1-2015)"

Look forward to hearing about it!

Thomas DeMoss · Answer

I agree with Luke, don't bet on appreciation. Also I would increase your rehab number, $2000 seems very low for houses in that area. I would like to have a 20% ROI in that area of Chatt as well. Curious who is loaning you the money? Most banks I deal with won/t touch anything under 50K.  Might be a better strategy, if you can swing it, to pay cash do the rehab then do cash out refi.

Bill Florence · Answer

Hey Kurtis

Those numbers meet my buy and hold criteria on paper. However a few questions come to mind. When you sell in the future, what are the odds you could give back years of cash flow due to falling property values ? When you sell, will your buyer pool be limited to investors in that neighborhood ? If it is a Class C or D area then you could also have a bumpy ride in the meantime. What is the school district rated ?

Bil Casimir · Answer

How old is the property? Did you have the property inspected since this is your first property? Did you check electrical? What about AC/Heater? Some things to consider.

Kurtis Montgomery · Answer

Hey Luke,

The property is vacant at the moment.  Every other property in the area if I flipped it in 3 years is worth double the investment, and there are a couple at this price in a 6 block area, but this one is the cleanest. Rents range from $600-900.

Luke Holcomb · Answer

kurtis,

All and all that looks good I think a lot of folks buy for 3% CTRR in East chatt. I wouldn't be on appreciation. It does look like you will be cash flowing quite a bit. Is it currently rented and if so, how much?

Is this a good FIRST deal?!?

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