First Deal in the works (woohoo!). Homerun? Good? Bad?

Question

Hey guys!My wife and I are fairly certain that we're going to be moving forward with our first deal shortly. If everything checks out, we will be buying a house from a relative who wants to retire. We're completely new to this, but trying to make our first buy. Sorry in advance if anything i say or estimate is way off base. The house is located at 510 Ansley Dr. Fort Wayne INOur offer is for:  Seller financed purchase. Total cost being $40,000 with 10% down payment. We would also add a deed restriction for if we ever resell the property, the owner would receive a % of the future profit (Likely between 10-20%, this is still being negotiated).It's a 3/1 on roughly an acre of land. Biking distance to Fort Wayne's Upscale Mall. Current property taxes are roughly $1,000/yearCurrent owner pays $350/year for insurance.Current Tenant is paying for electric and sewer (House is on a well, so no water).We think the property will need $10,000 of work to be ready for a short term rental (Air cons, some drywall work, moving/updating the well, landscaping)Our ideal plan is to turn it into an outdoorsy airbnb with a nice backyard feature. 3+ bedrooms in the area go from 60-120/night with ~68% occupancy on airbnb. We're conservatively estimating 70/night with 50% occupancy. Our estimated gross short term rental income = 1050/moOur estimated gross Long term rental income would = 750/moOur estimated expenses are at $400/mo TLDL:-Total Price = 40,00 + 10,000 reno-All in cash = $14,000-Estimated Cash flow = 650/mo-CoC return = 55%-Falls within 2% rule.-ARV = (We really have very little idea on this as there are not many similar properties.... and we're newbies. From my research, I think it would be anywhere from 70k-120k)-Bonus upside that it's located between commercial districts and could have a potential land buyout in the future.Home run? Good deal? Bad deal?Thanks guys!

Michinori Kaneko · Answer

sounds more like a flip material than rental then maybe... number sounds good though, as people say fall in love with numbers, not the property right. Maybe you can give airbnb a try, and if that doesn't work out, flip it and make a nice profit (although you have to give portion of that profit to the seller if i understood your original post correctly, but if you benefit, why not). Maybe you can do airbnb and once you have enough money to do the fixing to LT rental, you can do that too. sounds like you have multiple exit strategies so might work out well.

Nathan Jackson · Answer

@Dennis M. It cash flows 650+. Short term gross rent would be low end of 1050 with upside of 1700 (depending on usage and nightly rate increases after we gain traction). 50k all-in for 1k-1700 short term rent OR 50k all in for 750-900 long term tenant. I likely didn't communicate that well, but it's not 650 in rent.

@Michinori Kaneko Yeah the well concerns us as well... We contacted the city but can't be hooked up, so we'll have to figure out how to make it nice+obscure. Cleaning/replens costs will be rolled into whatever we charge them for cleaning, so it should be a break even. The reason I was leaning towards AirBnB is that I don't want to update the older electrical needed for a long term tenant. I may not understand if/when a house needs to be fully up to code, but I think I would need to do that for a long term tenant. Between the pipes+electric that would cut into rent profits pretty fast. For yard maintenance, I could fence in a smaller portion and let the rest meadow out. Zillow+Realtor+Chase+Redfin all estimate the house at 110k. This has a pretty big sway on my mind when I see that I can get it for 40k. Perhaps this is dangerous thinking though? Since this is my first, "I don't know what I don't know."

Michinori Kaneko · Answer

sounds ok to me.  some stuff that concerns me though is that house is on a well.  Also with Airbnb you will need to incorporate expenses for cleaning/replenishing whatever you do provide for airbnb. with all that headache in mind (+labor involved), is it worth the extra $300 per month (also note you'll have to pay for utility yourself if you airbnb)?

Your estimated expense includes the seller finance, tax, insurance, rehab?  remember if you have acre of land someone needs to take care of it... most renters don't like taking care of BIG yards.

Dennis M. · Answer

I would not do this deal for a few reasons . The main one is your likely overpaying . You have only revealed a few details of your terms with the seller . I would not pay 40 grand plus another 10 and headaches of a rehab to only hope to get 650 in rent . This doesn’t sound like a very great deal by the numbers  for you . I get a feeling that this Doesn’t sound like it’s a house in a great area .

Nathan Jackson · Answer

It's the 2nd or 3rd largest city in Indiana but not really a tourist place. People need AirBnB everywhere though, not just tourist areas. Judging by the utilization rate and number of reviews of the other AirBnBs in town, there is not much supply and a fair bit of demand. conservatively estimating $70 per night as that's the low end of the area, but with the right reno and marketing I'm sure we could hit $100/night. It's a cheap house in a cheap city, so we wont get 250-300/night rents like other areas do

Arlan Potter · Answer

@Nathan Jackson

We have  a vacation home that we also use as a rental. It is a winter/summer/spring/ Fall destination. Skiing, mountains, hiking, fishing,  etc..   Is Fort Wayne a tourist destination?

We get $225-#300/night   33% average occupancy, 120 nights per year.  You want $70/night

Maybe it is a great deal, but it seems that for what you are buying, a normal rental is more applicable.

But what do I know. Make some money

First Deal in the works (woohoo!). Homerun? Good? Bad?

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