Under Contract for First Rental Property

[Shawn Kostoff]

Good Morning BP!

Last night I put a property under contract that will be my first rental property.  I have experience with flipping and wholesaling properties, but this is a new venture for me.  I am looking for advice and potential obstacles to look out for in the process.  Anything you can offer is much appreciated!

The property is a 3 bed/1.5 bath townhouse in the Pike Creek area of Wilmington, DE.  It is 1750 sq. ft., built in 1978, and will rent for $1,450 a month.  It is a Fannie Mae Homepath property that the bank did a lot of work on.  They have replaced the roof, installed a new water heater and HVAC system, replaced the carpet, painted the entire interior, replaced the kitchen with new cabinets, counter tops and flooring, as well as rehabbed both bathrooms.  After a new refrigerator, washer & dryer, blinds, and few minor repairs the property will be in rent-ready condition.  The listed price was $144,900 and my offer of $136,000 all cash was accepted.  

My plan is to borrow private money to fund the purchase price and then do a cash-out refinance as soon as possible (within 3-6 months).  The property is conservatively worth $185,000 and I was given an unofficial BPO of $200,000.  I would look pull out $148,000 (80% of value) on a 30-year fixed rate mortgage through a local bank.

If you see any red flags or something I should be concerned about please let me know.  Thank you!

[James W.]

If everything goes well and you do end up with $100/mo cash flow, I don't think it will be scalable if you plan to grow in a similar manner as your DTI/DSCR will likely become an issue. If there really is that much equity in the place, and you plan to grow over time, I would consider looking to unload it at some point instead of considering it a buy and hold rental.

I know people discuss wanting to make $100/door, but that metric is better for someone with 100 units than someone with very few regardless of your cash outlay.  It would take a lot of risk and properties making $1,200/yr to make any money.  A risk I surely would not like to take.