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Updated almost 9 years ago, 03/02/2016
First time rental buyer.. HELP!!!
Hi Michelle,
Happy to help you walk through the analysis on this! I made a copy of the rental analysis template my business uses: Michelle's Rental Analysis
On the surface, the deal seems to have tight, if not negative cashflow. Feel free to play with some of the numbers that I was guessing on. For example, I took a swing at a 5% interest rate, 30 year term for you $168,000 loan. You can make adjustments to that to see how it influences the figures.
Some other numbers to keep in mind:
- I put vacancy at 0% because of your guaranteed rental income
- I have a 5% allowance for property management and repairs/ maintenance.
- I put in some initial numbers for property tax/ insurance. You will need to adjust this based on the property. This was a complete guess.
- Water and Sewer was a guess as well.
- Sanity check in any of the other categories...some may be zero...but some may not be.
Based on the numbers currently in (which will change), the deal seems to have a poor cap rate, negative cashflow, and all in all a relatively bad deal. The only potential upside you have is the expectation that the property will appreciate quickly and you will be able to sell for significantly more than you purchased for.
Please let me know if you have any specific questions and/or if you need help working through the analysis.
Originally posted by @Nick Baldo:
Based on the numbers currently in (which will change), the deal seems to have a poor cap rate, negative cashflow, and all in all a relatively bad deal. The only potential upside you have is the expectation that the property will appreciate quickly and you will be able to sell for significantly more than you purchased for.
Please let me know if you have any specific questions and/or if you need help working through the analysis.
Nick, exactly why is this a poor cap rate?
Hi Bob,
My initial numbers had a cap rate of ~3%. Obviously this will change as Michell updates with actual data.
Most markets would demand a cap rate of at least 6%...many much higher.
This was just an "on the surface" look. There are several factors that would influence whether or not this is a good deal...we are just getting started.
There is more demand if the cap rate is a lower number than a higher number so I don't understand why you think a market is demanding a 6% cap rate. That market is saying I'll pay 6% but at 5% I don't think there is profitability whereas in the 3% market the demand for the NOI is high and the market is willing to pay. Why would you think that is a poor cap rate?
I think we're talking past each other. I'm looking at it from Michelle's perspective. I'm looking at the cap rate she would purchase at. In her case, she wants to purchase at a higher cap rate rather than a lower cap rate. The higher the cap rate, the higher her NOI.
The higher Michelle's NOI...or the lower her purchase price, the higher her purchasing cap rate. In this case, we assume her purchase price is fixed. Therefore, a higher NOI would mean purchasing at a higher cap rate.
Thank you for setting up that calculator for me! The cap rate as is (with my adjustments) is 4.75%. I am not even sure what a good cap rate is in California.
Great! Cap Rate is just one of many factors that will go into the analysis.
What is important for you to consider is whether or not you are making the best use of your cash. In this case, the property would have negative cashflow. You may want to consider whether you can find a cashflow-positive investment with the cash you have to put down.
Let me know if you have any questions!
@Nick BaldoThanks Nick. As I'm just starting out, I think I know what a good deal looks like and have been looking at a variety calculators to reinforce or rebut my beliefs.
The house sounds nice and from the post it sounds like it is right around market value. The two things that stuck out to me were the high down payment required to get into the investment and the low amount of monthly profit obtained, if any, after expenses (tax, insurance, HOA?, damages, maintenance, future vacancy beyond the 2 year period, etc.).
I would set aside the security of the "guaranteed rent for 2 years" and ask yourself: 1. What is your criteria for rental properties (size/configuration, location, purchase price, money invested to obtain, profit obtained, long term strategy, etc.) 2. Does this property fit your criteria? 3. Will this property fit your long term life and financial goals?
My wife and I started investing by looking in the city we lived in at the time (Olympia, WA). It felt almost impossible to obtain a mortgage under market rents without placing a significant down payment on the property. Even at that point, I felt that we would be nearly breaking even and a lot of our hard-earned cash would be tied up. We began looking outward and found towns with cheap purchase prices and high rents. This is where we have focused the majority of our efforts.
I do not know your specific market or your situation. Hopefully you find something here to guide your decision in the right direction.
Best of luck!!!
David Stone
Elma, EA
Michelle so hard to evaluate as I do not know where about in CA it is. However you have to look at the big picture. Do know if it is in an area that will appreciate more or a growing area. Are you purley buying this for capital preservation or as vehicle that you banking on will appreciate? I like the year the the subject was built as one could assume upkeep wise in the next 10 years should not be too bad.
@David StoneThank you for the info. I would be interested in connecting with you..
@Michelle FrancisThis doesn't sound like a good rental. You might beable to buy 1 or 2 but you would be able to make a business out of it unless you had endless source of capital. You are deploying alot of capital for little return. Review your COC return...
Good Luck...
Frnakline
