Deal or No Deal?

Question

Ok, so I've been analyzing potential deals for 2 months (maybe 40-50 total) or so and am getting an itchy trigger finger for my first deal.  This popped up on our local REIA site and is bring sold by a large buyer/holder of SFR's in the Pittsburgh area.  I'd like to start a rental portfolio, though I'm open to flipping properties along the way.  Here's what I have on this....

Purchase price = $20,000  (it's a 3/1, and one half of a duplex)

Repair/closing/holding costs = $46,500 (it's also a dog, though has great bones, no foundation issues, and no "major" structural problems, just needs everything)

ARV = $80,000 (maybe closer to 90k, trying to be conservative with all numbers)

Rent = $1,100

Vacancy = 8%

CapEx = 5% (since most all work will be completed)

Repairs = 5%

Ins = $55/mo.

Mgmt Fee = 10% (to pay myself)

Property taxes are currently $125/yr., though will increase in year two to aprox. $750/yr

This is by far the worst property on a great street, probably a "B" area with many young families who are buying properties in the area.  I would pay all cash initially, and then re-fi for 15 years at 4.875% for 65k which leave me with $510/mo. mortgage.  Looks to bring in $186/mo profit until year 16...

It's my first property, so it would be jumping in head first with respect to the rehab, though I'm comfortable w/ managing it and working w/ contractors, which I have already identified.

This will go fast.  They already have an offer on it, so any feedback would be appreciated!!

Thank you in advance,

Blake

Michael Hayworth · Answer

A lot of things in life aren't really black & white- you have to balance competing principles.

Principle 1 is "an itchy trigger finger" tends to make you jump at bad deals.

Principle 2 is you've gotta get in there and do something sometime.

Being a new real estate investor is a lot like being a horny teenager - all the buildup, hopes, expectations....and the first experience often turns out to fall way short of your expectations. But you learn from it and the next time is better, and eventually you might even get pretty good at it.

This is probably not the best of all possible deals, but it's hard to find  awesome deals anymore in many markets. When BiggerPockets membership  numbers are larger than lots of small cities, you know there are loads  of investors chasing any good deal out there right now. As one to lose your virginity on, it looks fairly OK.

My first house was one much like this - I got it under contract for $32,000, realized during inspection that the basement was collapsing (we rarely see basements here in Texas because of shifting soils), and got the bank to lower the price to $22K. Put about $45K in it, sold it for $86K, made a little bit of money, but learned a lot. And I had to start somewhere.

If you're pretty sure on the rent numbers, you'll come out OK on cash flow - assuming you're also OK on the renovation numbers. I'd get it under contract, and find a contractor you can work with to get firm bids during your option period. (That may not be as easy as it sounds - search under my previous posts for lots of perspective on why many contractors, including me, shy away from investor business. But if you're actually in your option period, not just "thinking about buying this one", you'll be able to find a couple contractors to walk through it with you and give you a detailed bid.. Just be clear about deadlines.)

Good luck!

Joshua H. · Answer

For a flip:

That would depend on your area as well. What area are you purchasing this property? If the cost brings you to at or over 70% of the value of other homes, I'd pass on by. I wouldn't think it as a deal.

Long Rental:

That is not a deal IMHO. There are a lot of steps to your plan, many steps open to more risk of something going wrong. You are also sacrificing a lot of time into attaining $200 a month. I really think that you could find a better deal unless your looking in Fox Chapel/Squirrel Hill or something.

If it was in Oakland near the universities, I would consider something like... renting out a per-room basis at $450 - $550. That would bring you up to $1,350 - $1,650. Just something similar I was thinking about when looking at other properties.

Either way, let us know how it turns out man. There may be something here that we can't see or maybe the repair costs aren't as high. If anything, you could present your data to them and name your price for what you would purchase it for.

Kill it,

Josh

Brent Coombs · Answer

You lost me too at "half a duplex". And are you sure you want your first deal to be one requiring upwards of $50k (if not more) in rehab costs?

But, please don't screen so many potential deals again, before asking here again! All the best...

Dominic Lucarelli · Answer

The first thing I thought of when I saw your intro is: you're buying one half of a duplex? Although it's not a crazy endeavor, my thoughts are: why not buy the whole thing? Assuming all your numbers are laser accurate, buying the whole building and not half would sweeten the deal much more.

Now, onto the numbers:

$20k purchase + $46k rehab = $80k ARV?

Too dangerous for a flip. Just one hidden problem (sewer line replacement, new roof, etc.) will push your rehab budget higher. If you haven't done so, anticipate your first rehab to take longer and cost more than planned (because it will). You've got to strive to keep your costs within 70% ARV and present a property in that area that's the best in show. Which leads to the next point:

Are your finishes at the end going to command the $1100 rent you seek? Are there people renting similar units in your area at that rate? Check your comps. Ideally you should be the best looking property at that price point. If you are, you'll go a long way in keeping happy tenants in place!

Good luck, and keep us updated on your progress!

Jeff Stewart · Answer

Blake,

I'm not a buy and hold guy, but I can tell you that there is no profit here as a flip. You may already know that and simply don't care because a flip isn't your plan. But far wiser investors than me have advised strongly to have multiple exit strategies. I would imagine they would want your numbers to work for either a flip or a hold in order to ensure you have options on the back end. Just a thought.

Jeff

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