1st SFH Rebtal purchase pending... Thoughts?

Question

my wife and I are trying to land our first deal on a purchase of a SFH. Right now we have a pending offer on a 1000 sqft home for 42,500 cash. Asking price was 45,900. Rent potential is 750-850. It was just renovated with new carpet and paint. Needs a few things but nothing significant. A few details are below. I’d love to hear your thoughts on yes/no good idea. Any suggestions are always appreciated.

Location is Burton, Michigan. This is just outside of Flint in Genesee County.

Asking price: $45,900

Original offer: $40,000 cash

Counter offer at $42,500 cash

3 bedroom, 1bath 1000 sqft ranch on crawl space with shed in the back yard. Fenced in yard. Aluminum siding.

Home was previously rented at $750/month. Could get as high as 850 if appliances were included. Currently no appliances other than dishwasher.

City sewer. Water on a well (no fear of FLINT water, but not sure if that’s a positive to be on a well)

It runs on the BP buy and hold calculator as a 1.6% on the 2% rule. A little freaked out about paying all cash. In a perfect world I’d hope to get my investment back in 5.5-6 years maybe. Biggest fear could be, if we do all cash on house #1 how do I afford house #2?

Thank you so much for your thoughts. I appreciate your help and look forward to hearing your response.

Regards,

Edquan N. Dantzler · Answer

@Matt Kelty Congrats on the 1st deal! As an investor myself, in the city of Flint, and familiar with the area, very careful tenant screening will be key. Not having Flint water is great. Have the well system inspected. There are pros and cons on either side of the well water argument.

My advise would be to seriously look into the BRRRR method if you're looking at paying all cash. All cash would be easier to get the ball rolling, but the ROI you're looking for may be delayed 6 yrs or so. Leverage, if possible. It's not a "perfect world" in this area. If it previously rented for $750, I would use $750/$800 as your base number for calculations, unless you plan on doing something to make your home more attractive than comparable homes in the area.

A plus, (in my opinion), is that the right tenant, in that area, usually stays longer, so you may have a lower vacancy rate. But, it's still a 50/50 chance either way.

Good luck!

Jon Crosby · Answer

Hey @Matt Kelty, sorry for the late reply but thought I would just add to the conversation for you since it sounds like you are a little hesitant now that you are in offer mode maybe?  If you have historical rents at $750 and a purchase price of $42,500 on a renovated house (meaning I'm assuming it's finance worthy and rental ready), I'm a little curious why you wouldn't leverage it right off the bat?   That's ~$8500 down for 80% LTV so if you are able to pay all cash for this house, it seems like you can have at least 5 similar homes for that same amount of cash?  Mortgage this one, learn as much as you can and use the reserve cash when you are ready to pile on your portfolio.

Let me know if I'm missing something obvious though...I'm in California so it's always interesting to me to learn about markets where people can actually even 'see' the 2% rule in action.  :)

Best of luck and keep us posted on what you decide!

Edquan N. Dantzler · Answer

@Matt Kelty

We also are new to the screening process. There are a few property management apps, and systems you can find here on BP. I currently use RentRedi, which is sufficient for my current situation.

The background checks has been a valuable deterrent to unwanted tenants. Those with sketchy pasts don’t even waste the time.

We have been blessed to have tenants who were referred by friends of the family, and could vouch for character, and integrity. So far it has worked with no major issues for the past 2 yrs. Any potential tenant is going to be a gamble either way, so you have to trust whatever makes you most comfortable.

Carolina E. · Answer

@Matt Kelty Hi Matt, congrats on getting out there and getting started.  One question I have is what is FMV?  I ask because you could always do a cash out in about 6 months if you have any equity in the house and use that for the second one.  Did you have the well tested and inspected?  I wouldn't be too concerned if a lot of the houses around are on well, maybe that is what they would be used to in that area.

Jon Crosby · Answer

Hi @Matt Kelty! I think if you can leverage wisely then financing is great option and is most people's only path for scaling (unless you are good at syndicating).  Just be sure to find properties that allow you to have a high enough DSCR (over 1.3 maybe) that allows the property to continue to pay for itself for any rental market corrections or other unforeseen vacancy or rental rate issues.

I personally would only use a HELOC like cash to quickly acquire properties that you can then rehab and force appreciation and refinance out of.  Remember with financing you get to write off your interest as well so you should try and consider that in your yearly cash flow calculations.

Best of luck!

Matt Kelty · Answer

@Jon Crosby thank you for the suggestion. we're still going back and forth on this property. they originally accepted a different offer but that fell through and now its back to us. My wife and I have some concerns with this property just because of the location and we're worried about possible issues with a well. we've been on a well for the past 12 years in our own personal residence and we know what can go wrong.

That being said, what is your take on HELOCs? we've still been active looking at other projects and thinking finance of some sort may be the better way to go. do you (or others) see leverage as a positive or negative when starting up? I think the internal struggle we're having now is by carrying a loan the cash flow is drastically reduced. maybe it's just an issue of expectations.

thanks again for all of your time.

Matt Kelty · Answer

@Edquan N. Dantzler

Thanks Edquan. I think the well inspection is a great suggestion. As for screening Tenants in the area, do you have any forms or tricks you have used in the past?

Thanks again.

Matt Kelty · Answer

@Andrej Petrovski

Thanks Andrej. This one is just west of Center, but only by a block. Neighborhood looks alright, considering there’s 5 inches of snow right now.

Thanks again.

Andrej Petrovski · Answer

Hey Matt

A good rule of thumb for Burton is to stay east if Center Street .  That being said I know investors that have made great returns in the worst and best places in Michigan.  All about your tolerance level to the drama that comes with certain areas .  Good luck !

Matt Kelty · Answer

@Carolina E.

Thanks Carolina. I appreciate the suggestion. The BRRRRR plan is definitely something I’ve been thinking about. Homes in the area are anywhere from 35-70k.

Great point on the well. My personal house is a well and I’m used to it. But the inspection is an excellent suggestion. Thank you!

Thanks again. Good luck to you as well.

1st SFH Rebtal purchase pending... Thoughts?

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