Can someone with experience help me evaluate this deal?

Question

I have an opportunity to get a SFR for 45k that is in a rough area but newly renovated with new hvac, water heater, and roof. rent should be 750 per month, taxes 650, ins 900. assuming 35% for capex and repairs and 10% for PM. assuming 8% vacancy factor and 5% leasing. I have a spreadsheet with everything broken out and my COC is 5.72. I have a spreadsheet breaking everything down but can someone help me with this analysis? Thank you for the help.

Bryant

James Wise · Answer

ehhh doesn't look too great. Out here in Cleveland you could get the same amount of rent for about $30k-$35k. So if you were gonna buy a $750/mo rental in a crummy area you may as well save yourself $10k doing it. Nothing special about those deals in Cleveland either by the way. They are a dime a dozen. You can make some dough on them. I've made quite a bit myself but the tenant base is a real pain in the butt man.

It's a game of scale. Buying one wouldn't really be worth the hassle because these investments are inconsistent income. You'll be running fine then all of a sudden it all goes to hell. You want to have a bunch of doors so your performing assets carry your others during the periods of time you've got issues going on.

Bryant G. · Answer

Thank you Robert that is great and I have been very conservative with estimates which drives down the COC. I was hoping to get feedback on safe estimates for repairs and capex given the property is a turnkey rehab with mostly new systems and roof. I think my problem is I am too conservative and need to find a realistic number for repairs and capex

thank you for the time you spent that's very helpful and informative!

Bryant

Robert Leonard · Answer

@Bryant G. Welcome to BP!

Based on what you've explained and your analysis, I wouldn't pursue this deal. Here's why:

Your COC (cash on cash return) is far too low. You're taking a lot of risk for only a 5.72% return.

I think your vacancy factor is a bit low for my liking. Given that the property is in "a rough area", I'd estimate 10% vacancy. That may be a bit high/conservative, but that's how I prefer to approach a deal.

However, your CAPEX is high. I usually budget 5% for CAPEX and 10% for Repairs and Maintenance. You know the property better than I do, but if your estimate for those expenses is high, you will increase your cash flow. Also, you have 10% for a property manager. Managing a SFR is relatively easy, and is likely something you could do yourself to increase your cash flow and return. If you're not local or have NO interest in doing that, then you're definitely right by including that cost. It's just something I would personally look at doing myself.

Below is an image of how I'd analyze the property based on what you've said:

Robert Leonard

Jassem A. · Answer

For 45k I would look for an area that is not rough and at least 900-1000 for rent

Robert Leonard · Answer

@Eric Dami Absolutely - PM and I'll send you the link!

Robert Leonard

Eric Dami · Answer

@Robert Leonard I like the excel analysis, do you have this on fileplace?

Clayton Mobley · Answer

@Bryant G. I agree with @Robert Leonard that while your capex is high, your vacancy is likely low. When you say 'rough area' are we talking C-class? D? Warzone? I'm guessing it's most likely a D-class if it's $45k in ture tunrkey condition. That means whoever bought it and fixed it up got it closer to $25-30k....and you know where those props are. Based on the price and what it tells me about the type of area it's in, I would double check that rental figure as well.

The lower down the property ladder you go, the less it matters how turnkey the place is - remember that the tenant pool in 'rough areas' is comprised 100% of people who simply can't afford to live elsewhere, which means you're looking at a higher-risk investment. Lower income people absolutely deserve safe, secure homes, but from an investor's perspective, the risk of non-payment, eviction, squatting, and general turnover is simply higher with a lower-income tenant pool. Folks that can afford to live in the fanciest place in the bad area will almost always prefer to stay in a slightly older place in a nicer neighborhood.

If this is a Section 8 property, you also need to familiarize yourself with what that process looks like, how it works, what the turnover and wait times are, how much inspections cost. Many lower tier props look amazing on paper, but end up being a lot more headache in the long run with bureaucratic red tape and high turnover. If it's turnkey, your general maintenance might be low, but your turnover costs in a lower-tier neighborhood are almost always higher, and more frequent, so if you're not including those in your maintenance numbers, consider that issue as well.

Regardless of numbers, I pretty much always recommend that new investor stick to B-class props or higher - more stable tenant pool with more reliable income, no section 8 red tape, lower turnover, generally lower expenses. Esp if you're not looking to self-manage, a lower-tier prop will most likely not produce the net returns you're expecting. Most folks that do really well with C-class and lower have tons of doors and self manage to cut costs.

Can someone with experience help me evaluate this deal?

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