First Investment Property - would you buy this SFH?

Question

As the title says, I'm looking to buy my first investment property and hoping ya'll can help me figure out if it's a good deal or not. It's a small but nice turnkey SFH (2 bed, 1 bath). I'd be using a property manager. Here are the numbers:

Anticipated Sale Price: $44,900

Down Payment: $8980

Closing Costs: $2500

Repairs: None

Rent: $750/mo

P&I: $167/mo

Annual Income: $9000

Vacancy Rate: 5% ($450)

Mgmt Fees: 10% ($900)

Cap Ex: 8% ($720)

Maintenance: 8% ($720)

Annual Taxes: $1500

Annual Insurance: $550

Annual P&I: $2000

There are also tenant turnover fees that would cost about $650.

Year 1 (new tenant)

NOI: $3510

Annual Cash Flow: $1510

Monthly Cash Flow: $126

ROI: 13.2%

Cap Rate: 7.8%

Year 2 (assuming tenant stays)

NOI: $4160

Annual Cash Flow: $2160

Monthly Cash Flow: $180

ROI: 32%

Cap Rate: 9.3%

You get the picture.

The potential red flag for me is that my monthly cash flow would be either $180 or $126 -- and this is all dependent on tenant turnover. Let's assume the tenant turnover is every 2 years, and let's also assume that I hold the property for an even amount of years. In this case, we could just average out the two numbers to equal an overall monthly cash flow of $153. That's solid, but a bit lower than what I was hoping for.

Another potential red flag is CapEx. I would only be saving $720/year for CapEx, so if I got unlucky and had to deal with a large capital expenditure, it'd eat up my cash flow.

However, as far as I know the property is in very good condition. So the risk for a large capital expenditure is small. Also, Zillow says the property is likely to appreciate by 5% next year (not sure how trustworthy Zillow is, though).

Anyways, back to my question -- would you buy this home as your first investment property? It seems pretty low risk to me, with a moderate reward. I'm itching to get into the real estate game soon, but also trying my best to not act on emotions. Let me know what you think.

Thanks all!

-Brendan

Crystal Smith · Answer

The reasons I wouldn't purchase it are based on my current business plan, hence why I wouldn't do it. 20 years ago though I may have purchased this home just to get into the business.

Brendan Carlson · Answer

Hi @Kenneth Garrett,

Thanks for the response. I should have mentioned that the property is out of state in a working class area. I'd say it's a class B property in a class B neighborhood. It's not in Chicago -- if so, there'd be another zero added to the price. Maybe even two zeroes lol.

Regarding the mortgage, I've been working with a local credit union in that area and so far they haven't expressed any concern about the low amount. Probably because the prices in the area are relatively low. Don't get me wrong, a $45k property is definitely on the low end, but most properties in that area aren't worth more than $100k.

I have not walked the property (my agent sent me a video of him walking through it), however I am familiar with the area as I lived just a few miles east of it for four years. I've been putting a lot of trust in my agent. I wouldn't plan on seeing the property before putting in an offer, but if I put in an offer and it got accepted, I'd go see the property during the inspection.

It's good to know that my estimated cash flow is typical for a turnkey property. I am definitely considering putting an offer in. It's a rather small investment with relatively low risk so I think it'd be a good opportunity for me to get my feet wet.

You make good points about ensuring the furnace and roof are not old and also about acquiring a home warranty. I am definitely going to reach out to my agent regarding those things.

Thanks Kenneth!

-Brendan

Kenneth Garrett · Answer

@Brendan Carlson

A couple of comments:

How are you acquiring a mortgage of only $35K? Small mortgages of under 100K are hard to get. Where is the property located? Is this in Chicago? A price of this amount would be in a class D. Rough neighborhood? For a Turnkey property the cash flow is typical. They are usually between $175 and $125.

If it’s in good shape and the furnace and roof are not old then the numbers make sense. I agree Capex could hurt you if something big came up. Have you walked the property and visited the neighborhood? If you can acquire a home warranty to cover major items that could insulate you. They are about $650.

First Investment Property - would you buy this SFH?

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