Is this a good deal for my first rental property?

Question

Hi folk,

Thank you very much for your time to read and comment.

After listening to the BiggerPockets podcast for 6 months, I am very excited to get involved in real estate to build my freedom number. My goal is to get $150-$200 cash flow per unit. I have a full time Job, so I am buying properties from the turnkey company out of states.

Here is the number. It's a single family house, built in 1986, 3 beds, 2 baths,1 car garage, 1330 sqft, located on B neighborhood. Rehab is done; cost $29K.

- Purchase price: $91,900

- downpayment: $18,380 (20%)

- Rental income: $10,740 annual ($895 per month), It's tenant occupied now. Lease is two       years.

- Annual expense estimate: $10,008

• 5% vacancy -  $537
• Property Taxes - $1,190 
• Insurance - $430
• 5% Maintenance Reserve - $537
• 10% CapEx - $1,074 (This is based on the assumption that extensive rehab costs ~$30k and lasts for 30 yrs. But I am not sure if this is right)
• 14% property management -$1,504 (The PM is 10%, but they charge 1 month fee to screen tenants. I factor in that they got new tenant every 2 yrs. Based on this, the PM per month can be up to 14%)
• $4736 mortgage (30 years @ 5% fixed)

- Cash Flow: $732/yr - $61/mo (if budget CapEx), $1806/yr - $ 150/mo (if didn't budget     CapEx, because they spent $29k to rehab to property.)

- Cash on cash: 3.5% (if budget CapEx), 8.5% (if not budget CapEx, but remains 5%   maintenance)

Is it a good deal from a turkey company? At what price would you buy? I am still not sure how much CapEx I should budget.

Thank you very much again for taking time to read and feedback.

Jerry W. · Answer

You can put your money into tax free municipal bonds and make more money than that tax free.  I would look for a better deal.

Scott Trench · Answer

@Ruei-Jiun Hung

Congrats on getting into real estate and starting to do some real deal analysis! I think you are approaching real estate investing in a very intelligent manner!

As far as this property goes, it sounds to me like your goal is to get to your "freedom number." If that's the case, then from what you post here, it does NOT sound like this property is a good bet to get you there. If your stated goal is to get cash flow from investments in excess of your lifestyle, there are going to be far better properties that will help you achieve that goal than this one. A 3.5% cash on cash return is not acceptable, given your stated objective.

Now, if your goal were to build equity and long-term wealth, and this property were in a desirable part of town that was likely to boom over the next few decades and build substantial wealth for you, then this property *might* be a good bet.

But I'd look elsewhere for turnkey properties if your goal is passive cash flow.

Just my $0.02 - but like I said - I think you are doing a great job of thinking about real estate, educating yourself, and asking for feedback from the forums here!

Kevin Wall · Answer

I agree wholeheartedly with Scott on both the point that you are approaching this from a fantastic starting point. By that I mean you are purely looking at some sensible numbers and understanding how it relates to your overall goal.

My .02 that I would add is that you seem to be pragmatically looking at this as reaching a goal in the long term, understanding that it will take time to build your portfolio.

However, I'd echo Scott's sentiment that the numbers are pretty low. Think of a benchmark that would make it worth your time to investigate a solid investment. I think 10-12% CoCR is reasonable. So from there, consider the spread in the amount of time you've spent researching your properties and the long term wealth potential that a property will provide based on that benchmark. The further you get in either direction from the benchmark, the better/worse the deal is.

While deals like this certainly don't hurt a portfolio, I think for your first property I know there are better deals out there, WITHOUT sacrificing the turnkey potential.

Corey Woodruff · Answer

yes I have to agree with the others this deal. Does not sound like a good deal with only 3.9% return on investment and a cash flow of $61 a month it doesn't seem like this is going to get you to your goal that you want. But congrats on taking your first step on analyzing your property. Well done getting on here and asking others opinion but if it was my deal I would keep looking

Larry Fried · Answer

@Ruei-Jiun Hung I agree with the posters above.  As a cash flow play, this is not a good deal.  However, if it is well placed in a area primed for substantial appreciation over the coming years, then perhaps.

Ruei-Jiun H. · Answer

Thanks Scott, Kevin and Jerry's feedback - and thanks for pointing out it doesn't help to reach my goal.

I have another question about budget CapEx. Is 10% of monthly rent reasonable for the single family house? What number is reasonable?

Thank you very much!

Is this a good deal for my first rental property?

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