High Cash Flow / Mediocre ROI = Good Deal?

Question

BP Friends,

I'm looking at 5 single family new build homes as a bundle from a builder in Oklahoma. I would put 25% down at a 5% interest rate on a 30-yr fixed. I'm estimating the cash flow to be $530 per door conservatively. The ROI comes to about 9.45%. Brandon Turner says he targets 12% ROI. If the builder isn't willing to negotiate a better price is the cashflow for this property worth the sub-par ROI? Any tips to make these numbers better?

These homes are in a new development. They are going to be nice. There's a community pool and parks. A new highway is being built that will go through the town as well. I could potentially get up to $200 more per door, but want to be conservative when running these numbers.

Any advice is much appreciated. Thank you in advance.

Tyson Fugett · Answer

@Jon Crosby @Joe Villeneuve @Steve K. @Jimmy Dang

Hi BP Friends, thank you for the responses. I sincerely appreciate your input. Upon further research I would be taking unnecessary risk on these properties. The rents were inflated in the por forma I was provided which I realize is typical. I called local property managers and the rent I would need isn't close to what they are currently getting. In fact the most expensive property they are renting is $500 less from what I would need for this to be a good deal. I'm going to send an offer to the builder with the number I need for this to make sense. If the offer isn't accepted I'm moving on from this deal and searching for more.

If you have more questions around the specifics of this deal I'm happy to share more information. Again, thank you!

Account Closed · Answer

Hi again Tyson. Brandon Turner is just one person with an opinion just like everyone else on Earth.

I’m thinking you are missing some important calculations here with this cash flow number, like expenses.

Bill S. · Answer

@Tyson Fugett there are a huge number of red flags in your situation. You don't know what market rents are. The agent is doing both sides of the deal but relationally initially tied to the builder. There is no 2nd set of eyes representing you in the deal. You are negotiating to make the deal "work". Generally, new homes are almost never good purchases for investment. The money is made in the development (converting raw land to homes). It's not made by purchasing and holding the homes after they are constructed. New homes are for end users not investors.

In the last downturn, builders started offering "deals" on their new unsold inventory.

Again, I can't offer specifics but sometimes the best deals are the ones you don't do.

You seem emotionally hooked to this deal. Keep in mind, good decisions are not made emotionally. Emotional decisions are often justified with numbers after they have been made.

Bill S. · Answer

@Tyson Fugett just from a 10,000 ft perspective, new SFH have the lowest rent to price ratio in any market so a quick check is to look at the performance of other properties. If they don't cashflow $500 per door it's highly likely that the numbers for the new homes are not representative for the market. The reason is simple. New homes are the top of the desirability heap so they likely represent the highest purchase price. While they may command more in rent for the same reason they won't stay "new" past the first tenant and will fall back to market rents. You have to use market rents in your analysis which it sounds like you did and you saw the hole in the story.

Jimmy Dang · Answer

hey im glad you looked into the properties and contacted experts to validate your intent. good work!

Thomas S. · Answer

You need to do much more research on income real estate investing. I can not imagine any investor realistically achieving positive cash flow on any SFH of $500/month. It simply is not realistic based on actual numbers long term..

Tyson Fugett · Answer

Hi Bill, thank you for your input. That's a great point about the house not being "new" past the first tenant and to calculate market rents for future reference. I actually never thought about that. I've been working with my agent more on this deal. I really need an experienced investor to look at this with me to see if this is truly a deal. There are some items I've negotiated in the deal to make it better. For example, the Realtor is the buyer and sellers agent on this deal. He has agreed to take 2% less on his commissions. The Realtor is also doing the marketing at no charge to help get them rented out. In addition, I sent a counter offer to the builder for a 5% reduction in the overall price. In today's market, what is now considered a "deal"? For cash flow and ROI? I have the funds, just not the properties and I'm eager to get the ball rolling with investments.

FYI - The way I'm calculating cash flow/ROI is by using the 4 quadrants used here on bigger pockets.

Dennis M. · Answer

getting 500 per door is as rare as hens teeth . In theory If you bought a large older home in the Midwest for say 30-40 grand and could get 900+ a month in rent in a b/c area you could get close but what your purposing is much different than that .

Jimmy Dang · Answer

from my understanding, the builders have little wiggle room to make a profit but it never hurts to negotiate. if you can't get the ROI you are looking for then walk away, you can always find another deal.

Steve K. · Answer

@Tyson Fugett , we don't know all of your cashflow assumptions in getting to $530/door cash flow and 9.45% ROI.

I just listened to Podcast #237, wherein @ian reeves earns about $500 per door in Kansas with $41,000 invested. I calculated he's getting 19% ROI. That's a really high rent to purchase price ratio.

Are you self-managing? Is there "instant equity" you're getting by buying 5 homes in one package? Are you modeling that a new home has lower maintenance.

I have to admit.....in Denver, I've never run across a rental strategy where the new construction had the best rent/purchase price. I've always assumed that "new" rentals are a weaker return.

High Cash Flow / Mediocre ROI = Good Deal?

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