Deal Analysis For Roanoke VA

[Steve N.]

This is my first deal I'm putting together. I would appreciate any comments.

3 BR 1700sqft, SFR, Nice neighborhood, house is in very good condition, tenant ready, no deferred maintenance evident.

$142,000 asking price (owner indicated he is flexible)

$1200 rental income (I assume 95% occupancy so 13,800/yr)

$614 - 1st Loan - 126,000 30 yrs @ 5.13%

$300 - 2nd Loan - 20,000 Line of credit @ 3% - This help pay 20% down payment. This payment drops to zero over 15 years.

$210 - Operating Expenses (Insurance, land Taxes, Maintenance, etc)

$62 - estimated depreciation tax write off

$103 - estimated interest tax write off

$194 - estimated cash flow (after tax write-offs)

I'll be putting in about 15,600 of my cash into the deal for the down payment.

My metrics look like this

Cap rate 7.9%

Cash on Cash - 15%

I may be way off, but I think this is a good deal.

[Jon Holdman]

Yes, it does seem odd that if rents go up expense go up, too. Nevertheless, any time we have seen large datasets this ratio has been very close. J Scott wrote a hypothesis some time ago about why this occurs. His hypothesis, IIRC, is that its driven off expenses. If expenses are low in some area vs. rents, then more investors move in and buy more rentals. This creates higher supply, which lowers the rent. If expenses are high vs. rents then fewer landlords bother owning rentals in that area. That reduces supply and increases rents. 50% seems to be about where it balances out. You're not the first new investor to not believe this ratio. But there's strong support for it in actual data.

Do keep in mind a big chunk of that 50%, almost a third, is for property management. If you choose to "buy yourself a job" and do the management yourself you will make that money you would pay a PM. That makes the return better. But you're generating that return, not the property.