My 1st Post: Is this worthy of an Investment?

Question

Okay, first post here.  I am relatively new to the Bigger Pockets community and have been reading a lot.  Currently I am trying to dial in what the real estate market really entails for me locally (as I'm still measuring my comforts with investing further away) and whether or not I should jump in or continue to be patient.  I moved to Yakima, WA from Seattle a few years ago (roughly 3 hours east) and am considering a SF buy and hold investment as a rental.  As is, I'm not relying on any appreciation and looking at this as a vehicle for rental income.

Is the below deal worth pursuing? Any advice feedback would be appreciated!

Details:
3 bedroom, 2 bath built in 1960. 1600sf. No carport or garage. 0.25 acre park-like property. Doesn't require much for updates at all, good roof, all is functional, etc. For the most part, a turn-key property as I understand it. I am also extremely familiar with the property itself as this property is in-the-family so to speak. I am also extremely handy and could handle 95% of the repairs myself.

The property will likely go on the market for close to $235,000.  I can purchase it for $200,000 (would be bank-financed but for sale by owner).  Zillow puts it at $231,000 with a rental estimate of $1,400/month (which I feel is reasonable per my research).  I am not looking to flip this property in any shape or form.

That being said, here are my year-one assumptions:

Purchase Price:  $200,000Improvements:  $1,000 (washer and dryer, misc cosmetic small items such as a new ceiling fan)Closing Costs: $4,500Down Payment: $50,000 (25%)Interest Rate: 30 years @ 5.5%Monthly Rent: $1,400  (although hoping to list at $1,500 as a few comparable properties have achieved that)Vacancy Rate: 5%Property Taxes: $1,825Insurance: $200Maintenance: $1,680 (using 10% of rent but feel like this would be less doing things myself)Utilities: Paid by tenantYard work: Most by tenantProperty Management: None for the time beingAnnual Cash Flow:  $1,700Cash ROI:  3.39%Capitalization Rate:  6.13%Total ROI:  7.47%

I realize that this does not clear the 1% rule, but what are others doing in this case that don't want to invest in non-local markets? Am I just tying up my money or is it better to invest in these circumstances rather than clinging to the hope that the market for purchasing rentals will improve locally?

Thank you!!!

Casey Maib · Answer

Welcome Derrik,

I think its great that you can do a lot of the work yourself, but pay yourself for doing it.

Same goes for property management. Do it save the money learn the process but pay yourself. Plus what happens when you move or have to many units to manage yourself? If you calc. for PM it should still cashflow.

Another big ticket item you left out is cap ex. Repairs are Broken sprinkler heads and leaky toilets that happen all the time. Cap Ex is the 30 yr roof with 7 yrs left and water heaters and furnaces with ever shrinking life spans. Windows, cabinets, appliances and floors ect. These don't come up every year but saving 10% a year sure helps

Im a new investor as well so I like to run my numbers over the top conservative to cover the oh sh** moments I didn't think through. Be careful not to talk yourself into a property that doesn't make sense, it can be easy to do. Especially when dealing with family.

Its funny, I bought in Yakima because I couldn't find cashflow in Napa Ca.

Good luck

Casey

Jeremy Z. · Answer

@Derrik Jacobson

I tend to agree that the monthly rent of $1,400 is a bit low to justify a purchase price of $200,000, but I'll play devil's advocate here in order to make a couple of points...

Do you have any confidence that the Zillow estimate ($231,000) or potential list price ($235,000) are close to the fair market value? There comes a point when instant equity outweighs low or negative cash flow. If someone is willing to sell you a $1.5M property for $1M (and you had the means to purchase it) would you turn it down because it doesn't cash flow properly? That's an exaggeration, but it demonstrates the point.

The other question I would pose to you is how long do you think it will take to find a better opportunity? If you aren't interested in investing out of your area, sometimes you have to weigh the available opportunities in your area. If it takes you 3 years to find a better deal, well you might be in just about the same position buying the break-even property now due to principle pay-down. Many people will say keep looking, but they are often in areas where better cash flow properties are easier to come by. You have to use your experience in your market to determine if those better opportunities will be easy enough to come by in the not-to-distant future.

If you think the value of that property really is around $230,000 you may want to make an offer that finds the balance between cash flow and equity. Perhaps $190,000 would give you enough equity to make the cash flow, or lack there of, worth it. I understand there is a family dynamic here, but you could offer it delicately like, "I'm not expecting you to accept this, but this is the most I am comfortable paying in order to make the numbers work". At the same time, if it's family, maybe its just better to let them maximize their profits on sale.

I have a couple rentals, but I am roughly in the same boat as you - trying to decide whether to expand my portfolio or wait for better market conditions. I've pretty much decided to hold tight unless a deal I can't refuse comes along, but I wanted to make sure you were factoring principle pay down and "cash flow vs. instant equity" into your decisions. I feel like principle pay-down is overlooked far too much in these forums.

Best of luck in finding your next investment!

P.S. - I have definitely been giving some thought to some of the mid-west cash flow markets myself.

Derrik Jacobson · Answer

Thank you all for the great feedback.  I was hesitant to move on this one (hence my first post here on BP) but did feel like it was a unique opportunity that I wanted to make work... if it penciled.  I said no the first time around, but then came back around to look at the investment again.  Regardless, I am putting this one behind me and will continue to keep my eyes open.

Joe P. · Answer

Yep, first thing I saw was it didn't hit the 1% rule (monthly rent should be 1% of the purchase price). Now the 1% rule isn't everything, but I can tell you that I just sold my old property for around 200,000 and the rent was 1400. I broke even and that was by putting off some CAPEX, which is the new owner's problem.

It's good that you're handy and can do work yourself, but this thing isn't going to do much unless it appreciates at a high rate or nets you a great return on your taxes -- but cash is king in these deals. If I am paying 200k, I want 2000 in rent, more if possible.

As @Andrew Johnson indicated -- and he is a smart guy -- you're paying yourself to PM the property and nothing else, or investing for appreciation. If this is an area that will shoot up in appreciation at a high rate, then go for it. But if not...I would advise caution. This property will never make you any money.

Thomas S. · Answer

As it stands rent to property value is terrible. No sure why any investor would see this as a potential positive cash flow investment. It will be negative cash flow no matter how you look at it. You will need to supplement your tenants rent long term if you plan on holding on to this property.

Your 50K DP is buying a couple of hundred  per month in income leaving far lees to cover expences. This property has a major negative cash flow from the get go and will only get worse as expences climb over time.

If you are looking for income this is not the property for you.

Lose/lose.

Account Closed · Answer

@Derrik Jacobson

Cheers to you for pushing to get started! I think a property like this would be great in a lower market cycle because you could really bank on appreciation. I wouldn't move forward with this as a rental as a cash flow play by any means.

Couple things that stand out to me from your analysis:

1. You need to factor management in to your cost, even if you're self managing. If you don't it's really easy to get yourself into a situation where you just bought yourself a low paying job. Here's what I mean- by self managing and not factoring that into your pro-forma, you're achieving 1700/yr in cash flow, or "profit" as I would consider it here. Here's what you're doing in exchange for this profit: You're managing this property, you're performing repairs on this property, and you're tying up 50k of your cash to buy this profit annually.

2. Your ROI is very low. You can tack on a long term appreciation figure to that, but you won't see that appreciation unless you've owned it through several market cycles since you're buying it in a higher market. You'll get some debt paydown, but that's pretty insignificant, especially in the earlier years the way the amortization schedule works out.

I would definitely look for ways to get at leasttttt a 10% return on your dollar. That's not crazy hard either. And include a management "fee" in your pro-forma- consider it your payment for managing the property and separate from your desired return for investing that 50k. Sacramento is a pricey market, and I've seen people get 1% deals on 350k properties by getting a bit creative. Maybe shooting for a duplex instead (even if its small), or finding a university near a larger a multi-room SFR that you can rent to students on a room by room basis. Consult with buy and hold investors nearby and see what they're doing to get good values out of higher priced properties. I personally prefer to invest out of state, but if you don't, I wouldn't take the conventional route.

Hope this helped somehow some way!

Pete M. · Answer

@Derrik Jacobson You're getting plenty of great feedback already from folks on this thread, but I'll echo the hesitancy.  At a very high level, you're not hitting the 1% rule (which is not set in stone, but a good quick litmus test), and you're omitting several costs that should be included in your calculations, as @Casey Maib pointed out.  Even without those additional costs, I'd say your ROI numbers are too thin.  I've considered investing in Yakima myself, and it is definitely  an area where appreciation should not be anything more than icing on the cake; your cash flow numbers need to be able to stand by themselves.  Obviously this is all opinion.

On a side note, most investors consider CapRate inconsequential for anything under 5+ units.

Welcome and good luck!

Joe P. · Answer

Yep, first thing I saw was it didn't hit the 1% rule (monthly rent should be 1% of the purchase price). Now the 1% rule isn't everything, but I can tell you that I just sold my old property for around 200,000 and the rent was 1400. I broke even and that was by putting off some CAPEX, which is the new owner's problem.

It's good that you're handy and can do work yourself, but this thing isn't going to do much unless it appreciates at a high rate or nets you a great return on your taxes -- but cash is king in these deals. If I am paying 200k, I want 2000 in rent, more if possible.

As @Andrew Johnson indicated -- and he is a smart guy -- you're paying yourself to PM the property and nothing else, or investing for appreciation. If this is an area that will shoot up in appreciation at a high rate, then go for it. But if not...I would advise caution. This property will never make you any money.

Wendy Schultz · Answer

Would a short term rental work in your area? Is it a tourist destination, have a lot of big corporations or hospitals, people needing places to stay between homes, etc?  We do all short term rentals because the cash flow is much higher. There is more work and risk involved with vacancy rates but I prefer them over long term rentals.

My 1st Post: Is this worthy of an Investment?

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