My first deal - thoughts on the analysis?

Question

I'm a classic "analysis paralysis" real estate investor, but am finally in a position to pull the trigger on my first deal. It is a turnkey property, which I know causes some heartburn with many of you, but it is the right fit for me given the demands of my job and my current living situation. Here are the details.:

Purchase price: $109,950 (non-negotiable)

Type: Single Family; 3 bed, 2 bath

Rent: $1,095/month

Cash flow: $270 (25% down) or $205 (20% down)

Cash on cash: 11.2% (25% down) or 10.5% (20% down)

Assumptions: 7% vacancy, 5% capex, 5% repairs, 8% property management

Any thoughts or suggestions?

Jim K. · Answer

@David Boley

This is one of my longstanding beefs with Bigger Pockets armchair rental property analysis, David. Don't fall into the trap of ignoring the fact that real estate is REAL.

Just what are you buying? There is a very clear assumption here that all 3/2 SFR are interchangeable and equal. THEY ARE NOT. Each will have specific maintenance concerns, specific problem areas that will need to be addressed, specific things that you or your property manager are going to have to watch carefully to avoid their becoming much more expensive problems in the future.

This is an investment, sure, but you're buying a structure, that sits on land, that is located in an area, and all those things have very location-specific features that you will need to take into account in your business decisions.

It's not like comparing shares from different mutual funds, actively managed versus index funds. This is not FAGAX versus VTSAX.

Steve Rozenberg · Answer

@David Boley

Sometimes it feels good just to get a base hit not everything needs to be a homerun the more you were involved in real estate in the more transactions you get the more you’ll be able to identify deals, both good and bad.Trying to analyze them all the time without ever doing a deal will get you exactly what you’ve gotten so far which seems like no real estate owned.

I would focus more on the end goal of why you’re owning real estate and see if this property matches your strategy for the endgame not will give you today but what it will do in the future and will this help you achieve your goals that you ultimately trying to achieve in real estate

Account Closed · Answer

@David Boley

Think about your exit strategy also, this deal might get you into the game and learn more about REI. Consider the property's location. Is it a good part of town next to restaurants, cafes, grocery stores, parks, etc...? If you buy it with slim margins and then have to sell it for less than market, you might end up losing money. For example, you make $2,400/yr in cash flow and sell it in 5 years but have to deduct $10k off the price for XYZ reason. Add in CC and agent fees and you might only net $800 after sale. Make sure there's equity and good cash flow and it's in an in demand area.

Jay Hinrichs · Answer

we see this just in were you are in the country.  do you have snow.. freeze thaw.. or in spring when things grow wild  LOL  or texas were your soils move and create foundation issues over time .. or in Vegas were you have no yards  but sun beats the crap out of the places LOL.. how old is the house.. etc etc.

I like the 50% rule if it makes you a 100 or more fine.. but when you only use 30 % or 25% for running costs on these rentals your probably not going to hit your numbers over time..

Jay Hinrichs · Answer

David,,, IMHO  opinion buying rentals is napkin math.. its not really deep dive.

use 50% of gross income for all your expenses..  the ones you named above plus tax's and insurance.

if you still do OK after paying mortgage then you can deep dive..

One thing to look at is .. what is the leasing fee.. ??  if they charge a months rent then your vacancy factor is way low.

And of course 500 ..  a year for repairs is way low most of the time..  unless you get that perfect tenant..

There Is a lot more to owning rentals than the question what will it cash flow at out of the box.

the measure of rentals is IRR not initial cash flow sine initial cash flow can never be predicted.

Dan Mumm · Answer

The biggest question mark here IMO is the age/class of the property. Cap-ex is probably your most variable expense and this will correlate closely with the age. As others have mentioned, I wouldn't assume just a flat 8% for ppty mgmt, be sure to CLOSELY look at leasing fees, start up fees, etc. I usually end up at 10-11% when factoring these in.

This being said, I disagree with a lot of the sentiment above. $200/mo free cashflow on a turn-key rental in today's market is a FREAKING GREAT return, ESPECIALLY for a first-time investor just looking to get their feet wet. I'd buy that in a heartbeat, ASSUMING that the capex/repairs/ppty mgmt costs you estimated are true, which I have a feeling they may not be.

Ali Boone · Answer

Those numbers seem great for a turnkey, given your assumptions. A lot of turnkeys don't include CapEx estimates because they [should be] freshly rehabbed/renovated. So if you're including estimates for vacancy, repairs, and capex and you're still getting those numbers, that seems great. Likely you won't have to spend any money on those things initially for a while, so that would be quite the cash flow.

Where is this property, what market?

David B. · Answer

If the house is in a decent "B" grade neighborhood, if it has had a good rehab, and if you have good property management, then I would say it is likely a good turnkey option.

Sam B. · Answer

Looks fine for a turnkey.  Pull the trigger and get ready to learn.

I'm not a fan of turnkey but I guess it may help get you out of analysis paralysis.  Financing a retail priced property for $200/mo doesn't sound great...but big picture, if it gets you into the game, go for it.

Tim Herman · Answer

@David Boley In my area PM for a single unit is 10%. I like 8% vacancy. Your 10% repairs and CAPEX seems a little light. I don't know the condition of your major components. Year 20 of a 25 year roof that will cost $7500. 5 years. You will only have $6000 in your CAPEX and repair budget, providing you didn't have any other expenses. I downloaded a spreadsheet  that had most major components listed with their expected life spans. I have it on my computer but cannot find it on Bigger Pockets. The only other thing you could do is take all your extra cash flow put it in a reserve fund until you have around $10000, then start taking the cash flow to put towards another property.

My first deal - thoughts on the analysis?

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