Possible First RE Deal. Any Advice?

Question

Let me start by saying I am brand new to real estate investing.  I have been reading the forums here and listening to several podcasts and have recently joined my local REIA.  I am extremely excited about my future possibilities in this field and completely replacing my 9-5.

My original plan was to start wholesaling and build enough cash to invest in buy and holds for long term investments and passive cash flow.  I have started putting simple ads on Craigslist for the past 4 weeks and have gotten 4 calls from them.   This last call has gotten me a little excited.

The property is in the Treme area of New Orleans.  It is a SFR 4/2 1800 sqft in fair condition.  The owner has the property free and clear.  He has had SECTION 8 tenants in it for the past 2 years and has recently signed a new lease with a new tenant for $1350.  He had the property listed on the MLS starting at 69,000 in May last year.  He dropped the price to 52,000 in Oct. and withdrew it in November.  I pulled some comps that have sold in the last 4 months and they are around 30,000-35,000.  No wonder this house did not sell for 52,000.

For my feeble real estate mind this appears to be a really good deal.   If I can get it at 35,000-40,000, it won't take long to recoup the money.

How will I get the money?  I have a few family members that I am sure I can get to carry a note for me.  Lets say I get it for 40k.  A 10 year note at 10% would make the payments 528 a month leaving me with 822 a month to cover Insurance/Maintenance/Taxes.

Am I missing something here or is this a really good deal?  Is Section 8 a lot of trouble to deal with.  I have heard buy and holders in my area rave about Sect8 because of the guaranteed rent payments.

Help a first time investor out.  Should I pass on trying to buy and hold this property and wholesale it or skip the wholesaling and start building my portfolio?

David Driscoll · Answer

Pay for a private professional inspection. $500 at most.  Need to know if any code violations, handicap regs for the area. Tenants like to sue

Jason Blanchard · Answer

Bill W.  I may have miss typed there but I would only buy the property at 25-30k.

Bill W. · Answer

The home comps at $30k but you're excited about being able to buy it at $40k?  Makes no sense to me.

Why not, at the very least, go buy a home for $30k and put a Sec 8 tenant in it?

Jason Blanchard · Answer

I was just looking around at CAP rate equations.  
CAP= NOI/Value
NOI is expenses not including loan or mortgage.
CAP=670/month(8040)/30000=26.8%
If others are looking at caps in the 10-12% it looks like I will be making out quite well here. 
Are my calculations wrong?

Jason Blanchard · Answer

Insurance estimates for Flood, Dwelling and Liability are $3774.
Taxes estimated at $1000.
Maintenance 10% at $135. 
Vacancy 10% at $135.
Total monthly expenses at $670.00.
Insurance agent saw a couple things that may have to be fixed for the property to pass the insurance inspection from the photos.

Looks like with all the expenses, I am looking at about a $300 passive income.

Any suggestions on if purchasing this property to buy and hold would be worth it or should I pass it on as a wholesale deal to some local investors with more experience?

John Thedford · Answer

I just bought 3 houses and have a contract in on number 4. The insurance companies are a NIGHTMARE. I am looking at $6,000 in repairs just to keep them happy. I would definitely check on insuring the home before purchasing it as well as inspect it if possible. Be prepared for the unexpected. Make sure you have cash reserves because IF the unexpected arrives, you will need cash to take care of it.

Good luck!!
MGJohn

Jason Blanchard · Answer

Prashant P. I have contacted my insurance agent and she will be pulling some hard numbers for me.  The next time I speak with the seller I will be asking for a copy of the lease agreement.  Thanks for the info.

Prashant P. · Answer

Jason Blanchard, I would ask your insurance agent if they have landlord insurance and see what costs are for that.  For example my landlord policy covers liablity, lost rent as well as the structure.

Section 8 does require inspection prior to moving in.  I am not sure if they continue to do yearly inspections after the tenant has been living there.

If everything checks out and there is no major maintenance issues, it seems like it would be a good property.

I would also ask to seller to see the terms of the lease with the tenant.  Make sure there is no funny language.  There shouldn't be since its a S8 rental but good to check.

Jason Blanchard · Answer

Prashant P. I have not toured the property but plan on doing so in the next few days.  I have seen pictures of the property that were listed on the MLS and it's not a beautiful property but it is livable.   The seller mentioned that he has installed a  new Central A/C unit 1 1/2 years ago.  and has done some other renovations since he has owned the house.

I was definitely planning on calling my insurance agent to get some numbers on the coverage.  Louisiana has trouble with the whole insurance thing since Katrina.  Home Owners, Hazard Insurance and Floor will be a definite. Are their any others I would need to look at getting for rental property?

As far as the condition of the home, doesn't Section 8 require an inspection of the house in order for them to place tenants in?  The fact that he has a new tenant seems to be a  good sign of the properties livability.

Prashant P. · Answer

Have you looked at the property?

In my area, I have noticed that people who own free and clear properties as rentals tend to neglect their homes.  I would do a tour of the house and see what conditions the roof, mechanical systems are in also.  These could be hidden costs that you are not aware of.

I would also get simi-firm numbers for insurance and taxes, then figure in vacancy and maintenance to get a better idea of cashflow.

That is where I would start.