SFH - Triangle area, NC - newbie here

[Ashley Rummage]

Would love someone to punch holes in this analysis. My goal would be more appreciation due to it being right beside a downtown area that is being revitalized. Brand new but trying to get something going to get in the game. Not a slam dunk, I know, but is it worth it to get started? Would love all of your expert opinions!  Thank you :)

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*This link comes directly from our calculators, based on information input by the member who posted.

[Richie Thomas]

Hey @Ashley Rummage, I'm also a new investor so bear that in mind as you read this.

I'm personally wary of banking on appreciation, it seems more like speculating than investing (more experienced investors than myself have said essentially the same thing).  If there's another downturn and the property goes underwater, you'll need to cover the difference between your monthly income and costs, while you wait for the property value to recover enough to where you can sell it.  If your property is cash-flow-positive, you won't have that same pressure.

On to your numbers. CapEx and Repairs budget is a combined 18%, which seems OK to me. Vacancy budget is 5%, which might be low. 1 month of vacancy will cost you 1/12 (or 8.3%) of your top-level income, or $133 per month ($1,600 / 12 months). That would cut your monthly cash flow by almost 40%, from $347 to $214. The cash-on-cash return of 7.55% was already kind of slim (the stock market averages 8-10% per year), and that 1 month of vacancy would make it even more so. And if you're unlucky enough to get a professional tenant on your hands, and if you're unlucky enough to own in a landlord-unfriendly state, you could be looking at multiple months before you're able to initiate an eviction.

Looks like you haven't budgeted for a property manager.  That implies you'll be running the show yourself.  Which is fine, if it's what you enjoy doing.  That said, one of my favorite BiggerPockets cliches is that you want to buy an asset, not a job.  Remember that self-managing will be difficult or impossible to scale as your portfolio grows.  It's like investing in a Subway sandwich franchise- you can't be out scouting for new restaurant locations if you're behind the counter serving Cold Cut Combos.

If you raise your vacancy budget from 5% to 10%, and you budget 10% for a property manager (which you should do anyway, even if you'll be self-managing), the monthly cash flow goes from $350 to $150. And that's without any other monthly expenses like lawn care or snow removal, or the vacancy issue I mentioned. Also, the 3.4% interest rate estimate on an investment loan is lower than what FHA charges for an owner-occupant loan. Your actual interest rate will vary, but investors with 780 credit scores have been quoted 5.8% for conventional investor loans, and anywhere from 9-12% or more for portfolio and/or hard money loans. When you factor those costs in, this property is probably cash-flow-negative.

There are a few other issues too.  The up-front repair budget is only $1,000 on a $200,000 purchase price, which seems low to me. The total cost of your project is more than its after-repair value, which means you're losing money on both the monthly cash flow and the initial acquisition.  Lastly, the budget for closing costs is only 2% of the purchase price, whereas I've seen others estimate anywhere from 3%-6%.  These are of course negotiable terms of the deal, and you can always ask the seller to cover your closing costs as part of your offer, but there's no guarantee they'll accept your terms.