Our Second SFR: Good enough? Clueless about rehab costs.

[Hilary Hageman]

Hey guys!  Mind giving this deal another pair of eyes?  It needs a face-lift exteriorly but doesn't need much at all inside.  Needs an update on an ugly brick porch (ideas?) and a small area (100 sq ft?) of shaker-type siding to make it cuter.  No clue what these rehabs would cost.

Otherwise, here are the numbers:

- $69,900 asking price.  Offer $60.  Accept no higher than $65.

- 3B/1B, 1,080 sq ft

- Up-and-coming semi-urban neighborhood with lots of city plans for high-end retail and apartment development about a mile from Notre Dame University.

- Taxes: $500/yr

- $850/mo = market rent

- 10% property management = $1,020 (we currently manage ourselves but plan to hire-out management when we get to about 10 properties - we currently have 2.)

- 2% vacancy = $204/yr

- Insurance $500/yr

- 5% repair budget = $510/yr

- Cap ex of $120/mo = $1,440/yr

- Mortgage terms: 25% down, 15 years at 5% interest.

I tried to be conservative with these numbers and cover our rears. Is there anything I'm leaving out? Should we make the offer of $60K? I figure the above numbers to yield a $112.58/mo cash flow and a total ROI (including equity pay-down, but not tax incentives) of 18.9%. Again, this is figuring on property management which we won't use for at least 5 years and a 15 year loan.

[Jay Dewberry]

Hi Hilary. Taking a look at your numbers, the first things that come to mind are:

• 1)Financing. Is there a particular reason for putting 25% down over 15yrs, instead of 20% down over 30yrs? Putting 20% down at 30yrs would increase your cash-on-cash return. Perhaps you're looking to refinance and/or sell sooner than later…which begs to ask, what's the ARV?
• 2)Offering 60k is fine with me, however perhaps offering lower such as say $51,700, along with a $1000 EMD, would not only show the owner you're interested, it also shows your serious in buying and/or opening up negotiations.
• 3)I agree with Ross that your vacancy seems a bit low. Perhaps check with your agent for comps.
• 4)Lastly, and what could be the most important is the rehab work. If you decide to contract with the owner, make sure to include your contingencies and get some inspectors and/or contractors in there to give you the real scoop on what’s going on with the property. You can go from $5k in rehab to $25K if not looked at properly.

Either way after looking at a couple of calculations, it looks as though you ‘may’ have a possible cashflow property. Hope that helps. Good luck.