Analyze first deal, potential rental w/ pics

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Analyze first deal, potential rental w/ pics

Pete McPherson
Rome, GA · Member since 2015 · 20 posts · 6 votes

The story

My wife and I live in Rome, GA, and the property in question is in an amazing location. A 90 second walk to downtown Broad Street, the hippest coffee shop in town, etc. Downtown Rome is booming and growing, and rents have been going up steadily for a while now.

We found the following house, and would love to live in it or rent it or AirBnB it. (it's zoned so that AirBnB should actually be really easy).

We're under contract, and our due diligence ends two days from now, Friday.

The numbers:

  • Sales price: $112,000 currently (we might drop down a bit based on the issues described below).
  • Seller contributes at closing: $2,500.
  • Financing: FHA 203k Streamlined. (we're aware of the occupancy requirements)
  • Down payment: 3.5% ($3,900 roughly)
  • Repairs & renovations: $40,000 almost exactly (we have contractor estimate in hand) $30,000 would be financed into the mortgage.
  • Taxes, Insurance, PMI: $1,500, $1,000, and $1,300 estimated, or about $360/month
  • Total debt service: The above number plus P & I = $940 a month.
  • Estimated R&M and CapEx: I'm trying to be conservative at $315 a month. The roof, HVAC, and water heater will be new.
  • Property management / advertising: $80/month estimated
  • Estimated Rental rate: $1,300 - $1,700.

The issues

Rent

Super hard to estimate for the area. Rates are kind of all over the place in Rome. 3/2 apartments outside of down that aren't very desirable can be $750-850.

Downtown lofts ON Broad Street (the main road in our town) are all between $1,100 and 1,800, with half the square footage as our house would offer.

Downtown houses near ours, but with 1,000+ more sq/ft than ours...rent for $2,500 or more.

To the best of my ability, once it is renovated, it will be very desirable to our target market tenants (young professionals). I believe it could rent for $1,500 - $1,600 after a month's worth of free marketing and word of mouth.

50% crawl space

Roughly half of the crawl space is not accessible. It's tiny (home built between 1910-1950. Still trying to determine that).

Some moderate termite issues were found just today, requiring $750 for a full treatment before they can issue a termite letter.

According to my FHA lender and her underwriter...this termite inspection / letter should be acceptable. The report would just say "and we can't issue opinions on this portion of the house as it is inaccessible, etc."

Advice/feedback?

When I run my numbers, they come out super close. $100-200 dollars in either direction depending on the circumstance, and that's with what I believe to be super conservative figures.

That, and at the end of the day, the location is amazing, super close to downtown, and highly desirable to our target market tenant. There is simply very little rental opportunities right in our area.

While we don't plan to start renting out right away (due to occupancy stipulations...and the fact that we do want to potentially live there part time anyways...), I'd obviously prefer it cash flow when it is rented out.

And the numbers are close. Thoughts?

Here's the property on zillow with pics, etc. It's ugly and needs the $40k in repairs/reno...but it will be mighty fine once that's taken care of. Still. Some risks.

Love love love to hear everyone's thoughts.

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  • Luke H.
    Real Estate Investor · Dallas, TX · Member since 2013 · 388 posts · 174 votes
    9y

    My rule of thumb is I need to be able to get in rent, 10% of total cost. So if it cost me $140,000. I need my rent to be at least $1,400. In other-words, will it give me positive cash flow.
    Rents are all over the place? Did you walk down the street and knock on everyone's door, introducing yourself, explaining you plan to buy, if they rent& if so how much, and if they can give you any advice on the property?
    $40,000 in repairs? Wow!
    Hope this helps and good luck.

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  • Rick Baggenstoss
    Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
    9y

    @Pete McPherson  Sounds like an interesting deal.  

    Termites/damage is very common.  Rarely will you buy an older house without termite damage.  Being a much older house it can be extensive but it's usually obvious if has gotten out of control.

    When you walk through the back of the house, could you sense the damage?  Jump up and down on the floors.  Did you see damage on the baseboards?  

    You've got to do better on your rent estimate.  That's a huge swing.  What are the features of the higher end rented places vs. lower end?  

    Lastly, if you don't understand what's driving rents, then you shouldn't be renovating (except to neutralize the paint).  Might be nice to live in the house for a bit, get a handle on the issues, and rehab when you know how to drive your rents up with the $40k rehab budget.  

    I can do a pretty big rehab for $40k.  Hard to see that you need anything close to that in this house.   I'd cut your budget to $15k  - $20k -- focused on the kitchen and bath(s). 

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  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    Howdy @Pete McPherson

    I'm confused?!  The link you provided is to Trulia and the price is Listed for $144K.  I did find it also on Zillow.  So is $112K the price you negotiated with the buyer?

    What is your ARV/Market Value ? Did you get comps? Are you using a Realtor? If not you need to be. They should be able to get the appropriate comps for your ARV and the Rental Market rates.

    You describe it as an ugly house.  How current are the pictures?  I would agree with @Rick Baggenstoss.  I can't see where the big Rehab job is needed.  Except if you are wanting a complete new paint job (inside and out) because of current mixed color scheme.... Yikes!  Also, updating Kitchen and bathrooms.  No where near $40K judging by the pictures.  So what have you/your contractor identified as needing Rehab? Roof, HVAC, water heater, and what else?

    Cannot say if this is a good deal or not.  Still need more clarifying information.  You left out a lot of expenses for Cash Flow analysis.

    Just remember the adage "Fall in love with the numbers .... Not the property ".

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  • Jeff Kehl
    Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
    9y

    @Pete McPherson

    Hi, 

    I live and invest in Rome. I own a lot of property here and I'd guess $1000-$1200 on the monthly rent if you rent it long term. I really don't own anything downtown but I don't really see many houses going much above that unless they are very large and in a prestigious location and even then they top out at $2000. I don't think this house would compare with the lofts downtown and there's been so much supply of those recently I don't think they will get the rents they are asking.

    The four big property managers here are hardy realty, garden lakes, seven hills and Harvey-Given. You can google them and watch their inventory. Occasionally they have houses downtown. They would also probably be happy to tell you their opinion on rent, PM me if you want a few contacts.

    I think you are on to something with the AirBnB thing though. I've been thinking of doing that downtown for awhile now but haven't really found the right property. If you do go that route I'd love to hear how it goes.

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