Deal analysis. Worth it or not?

[Ben D.]

Hey everyone,

I am looking at purchasing the following rental but thought the return may be too low. Am I being too conservative?

It's an out of state rental, but according to realtor it's in a desirable area with 3 very sought after schools. According to the realtor I'm working with, it's also in move-in ready condition. This is rare for the area it's in. The house has new vinyl siding, fresh paint and a metal roof that was serviced about 7 years ago. Septic tank was also cleaned about 3 years ago.

I called a property management company and they estimated it could rent for an average of $1,050 / month. Based on my research I could bump the rent to $1,100.

The conservative numbers are as follows:

Asking price: $120k
Offer: $106k
Closing costs: $3000
Down Payment: 20% = $21,200
Loan Amount: $84,800
Rate: 5.125%:
PITI: $541.72
Gross monthly rent: $1,050
Management Fee: $105 (10% + first month of rental)
Maintenance: $100 (10%)
Utilities: $0 (still validating that tenant pays all of them)
Reserves/CapEx (5%): $52.50
Vacancy rate (3%): $31.50
Total Gross Annual Income: $12,600
Annual Operating Expenses (no mortgage): $5,373
Annual NOI: $7,227
Operating Expense Ratio: 42%
Monthly Cashflow: $131.78
Annual Cash-on-cash: 6.53%
GRM: 8.41
DCR: 1.30
BER: 86.62%

I am still getting quotes from lenders though so if I do the following:

Rate: 4.125% (buy the interest rate 1 point down or go with different lender)
Closing costs: $4,000
Rent: $1,100 / month

Then the numbers look more like:
Monthly cashflow: $219
Annual cash-on-cash: 10.45%

This doesn't seem like a screaming deal to me. Not in the 15-20% that savvy investors would look for when balancing out of state rental risks. However, it does offer the ability to reduce my taxes as well as the possibility for appreciation given the area it's in.

What do you guys think? Is this worth the risk being my first out of state rental?

Really appreciate your feedback.

Ben

[Christopher Brainard]

@Ben D.

You lost me at "According to the realtor". When you invest in a property, you must know the area and you can't rely in the information of someone who stands to profit from your purchase. I'm not saying that your realtor is incorrect or all realtors are evil, but the requirements to get a license are very low and it is very easy to get an uninformed opinion from one.

As for your numbers, your vacancy rate is low, I always budget 8.3%. Repairs/Capex may be a touch high, but depends on the actual state of the property. You need to find out about those utilities, that could eat all your cash flow up quickly, even if you only need to pay sewer. I don't think this is a very good deal, if you're investing out of state in an attempt to find cash flow, I'm certain you can do better than this. This is the type of deal I would expect in a hot, competitive market in an appreciation heavy area.

-Christopher