Great investment or not?

Question

A SFR is selling for $315k that a person plans on purchasing as an investment property. The individual is required to make an investment down payment of $63k (20%). Additional expenses include: $600 yearly insurance, $30 HOA, and $100 monthly management fees. Monthly mortgage payment for 30 years with 4.5% interest rate is about $1,400 (total monthly).

The property is currently being rented for $2,400 with an immediate positive cash flow of $1,000. Seller will not budge a penny on the selling price.

Is that a reasonable investment? Requiring 63 months for an investor to get his initial down payment back, plus chipping away a bit of the mortgage, and possible appreciation?

Note: Decent location with about 3-4% yearly appreciation.

Breakdown:

1. PITI & Management: $1,400

2. Rental: $2,400.

3. Initial Investment DP: $63,000 (20% of $315k)

4. Monthly Positive Cash Flow: $1000

Thoughts?

John Leavelle · Answer

Howdy @Sal San

You will find the definition of a "Good Investment " can be different for every investor.  It depends on your goals, investment criteria, the type of properties, and the Market you are investing in.

For instance I am a Buy and Hold investor.  The strategy I primarily use is the BRRRR strategy.  So I'm looking for distressed properties that allows me to force appreciation.

Some criteria that I use are;

1. The property must meet or exceed the 1% rule at purchase (rental income must be 1% or greater of the purchase price).

2.  The property must be able to Cash Flow a minimum of $100 per unit using the 50% rule on initial analysis.

3.  I must be able to purchase the property at a discounted price to enable me to force appreciation to allow me to recoup my total cash invested.

4.  COCROI must be 12% or better.

I do have other requirements depending on the type of property.

Some investors may want appreciation more than Cash Flow.  Others might want more Cash Flow than appreciation.

The bottom line is you have to decide what makes a good investment for you.  What will help you meet your investment goals.

Andrew Johnson · Answer

@Sal San Ummmmm...so a few things sound "off"...

1.) $600 per year to insure a $315K property?  Do you have a quote or is it a guess?

2.) Management fees are 4.2%?  Again, is that a quote from a property manager?

3.) You will have expenses, vacancy, have to do a cap-ex hold-back, etc.  The $1,000 is maybe your net operating income but *not* your cash-flow.

4.) Odds are your free cash-flow will be closer to $200 per month.

5.) Your cash-on-cash return will (best guess given the information provided) be 3.8%.

Suggestion:  Try using the BP Calculator to get an accurate assessment of cash-flow.

None of this is to say that this property is a "bad" deal.  If similar properties are selling for $500K, it's awesome!  If it's a property you believe in then there are far worse options posted here.  But it's just kinda hard to make general good/bad with only droplets of information.

Sal San · Answer

Thanks all!! Valuable insights.

Joe Hines · Answer

As others here have said, it fails the 1% rule and that raises a red flag for me.  Unless I was planning to live in it one day or it was meeting some other very important strategic goal and I was paying all or a substantial amount in cash I'd pass.  Just a lot of risk there and that can put a drag on your overall portfolio.

Jeff Petsche · Answer

@Sal San BP has some great calculators and if you have the PRO membership you can use as often as you want. Unlimited reports.

I use both the BP calculators and also another analyzer I have access to through an investment group I belong to. (not related to BP).

John Leavelle · Answer

@Sal San

Try using the calculators here on BP.

Sal San · Answer

Thank Jeff. Any advice for a software analyser or calculator?

Jeff Petsche · Answer

@Sal San I'm sorry to say, but this is not a TRUE $1,000 a month positive cash flow. You have not factored in vacancy (5-10% of gross rent), repairs/maintenance (5-6% of gross rent), CAPEX (6-8% of gross rent), property management (8-10% of gross rent). The rent to value ratio is .07, so although it's not terrible, it's not hitting the 1% rule either.

Even IF you know the property is 100% rented and the person plans on managing it themselves, you still factor in these expenses when analyzing a deal because some day they may not want to manage the property themselves AND there is no guarantee it will always be 100% vacant, so you must factor in these numbers. As for repairs/maintenance and CAPEX, this house will need these things over time, and thus the deal should be analyzed as such.

Most people looking to buy a rental only look at Mortgage (PITI)-RENT=Cash Flow, and that is SO NOT THE CASE, which is why they lose money or buy a bad deal.

Based on the numbers you provided and running the deal through my software analyzer, the NOI comes to $14,400 (50/50 rule) and the debt service comes to $15,322.16, so you have a LOSS of $922.26 each year. Cash on Cash shows a -1.4%.

Total investment to get into the deal is approx. $69,300 (20% down payment, 2% in closing costs).

If this deal came across my desk, I'd pass and move on.

Michael Plante · Answer

I agree each person like different investments

I see you are in HI I have zero experience there

All I know is what I hear which could be totally wrong.  That HI Is very expensive for the most part

I would suggest looking for an RE group there.

Or maybe look for the true identity of rich dad ;)

Sal San · Answer

Thanks john. I hope to be as knowledgeable as you in the future. I appreciate your insight.

Great investment or not?

Most Popular Reply