First Deal Analysis Feedback

[Keith Linne]

Hello everyone!

I work full-time as a general contractor and have my Residential Building Contractor and Residential Real Estate Broker licenses in Minnesota. From 2011-2014 I flipped roughly 30 houses, so I have a solid background in comping properties, rehab costs, etc.

This year, I'm aiming to pickup my first buy and hold investment property. If things go well, I'd like to own 4 units by the end of 2018, and continue to scale from there.

With the above in mind, I'm analyzing as many deals as I can and would greatly appreciate feedback regarding the below property (whether you feel anything is missing, your thoughts on the returns/cash flow, etc). I think I should pull the trigger, but I would welcome both agreeable and dissenting opinions!

Student Rental (4BR/1Ba) - $90,000 List Price

Offer: $80,000 purchase price, 3% seller paid closing costs, 20% conventional financing

Cash Outlay: $20,000 ($16,000 down payment, $4,000 rehab)

Rent: $1,240/mth

Mortgage Payment (P&I): $344/mth ($64,000 @ 5% interest, 30 year am)

Taxes: $133/mth

Insurance: $150/mth

Vacancy: $112/mth (9% - playing this conservatively)

Maintenance: $75/mth

CapEx: $125/mth

Management: $149/mth (~12% rents collected, conservatively assuming full occupancy)

Utilities: N/A (covered by tenants)

I like this deal for a couple of reasons. First, it has fairly low entry cost for my first property (relatively speaking). I'm factoring $20,000 out of pocket for this deal; however, since it's rented through March 2019 the "rehab" money I'm noting ($4,000) shouldn't be needed until first tenant turnover. This gives me a maintenance/CapEx cushion from the outset, if there's a break down or emergency.

Second, the property seems poorly managed. Similar properties (4BR) are renting for $1,400/mth + utilities ($350 + utilities per bedroom). With proper management and updates, I should be able to increase gross rents by $160 monthly ($1,920 annually) after the first year. I also have 12% projected as management cost and I’m figuring that cost at full occupancy to remain conservative; however, based on conversations so far I believe I can get this down to 10% of rents collected.

I see this property throwing off roughly $1,812in cash flow ($151/mth). COC return is 9%. Equity accrued is $944, for a total first year ROI of ~13.8% ($2,756/$20,000). If the rent increase goes as planned, second year cash flow increases by roughly $125 (after accounting for the increased vacancy and management allowances). COC jumps to ~16.6% and total ROI 21.5% (equity of $993 accrued in year 2). Those figures are the reason I'm interested in the property, especially since it's a long term play.

I know there are many investors who caution against student rentals; however, I’m younger (29) and don’t have an issue with the extra time/headaches required to manage these types of rentals. For each “con” to this niche, I see an offsetting “pro”.

I hope the above makes sense. If you have a moment, I’d greatly appreciate your feedback!