So my 2nd rental property is still under rehab… but wouldn’t you know that the house right across the street went up for sale? It’s tempting, to say the least, and probably not the best move to make, but I guess it also wouldn’t be the worst.
To keep this post short and sweet, here are the numbers we’re working with:
Purchase Price: $58k (closing costs included)
Cash In: $10k (15% down + inspection + minor fixes before being rent ready)
Rent: $800-900/month
PITI: $439/month
Maintenance & Vacancy: $120/month
Net Cash Flow: $241-$341/month AKA 29-41% CoC Return
Now keep in mind, $241-$341/month in pure profit might not be a lot to most people around the US. But here where I live, it can be a substantial amount. For me, personally, $241/month is almost 1/3 of my current home expenses, AKA mortgage, insurance, taxes, utilities, plus phone/cable bills, too. If I were purchasing this property back during the good ol’ days of interest rates, I’d be pocketing an extra $150 or so, but unfortunately times change.
I’ve already got the property under contract but I’ve been waffling on pulling the trigger, primarily because (1) the purchase price is a bit high for what USED to be the prices for the houses in the particular neighborhood, but after the 2021-2022 real estate run, it’s anybody’s guess where prices should actually be; and (2) after poking through real estate forums it feels like I’m doing something wrong by NOT utilizing the BRRRR method or at the very least not purchasing the property for 75% or less of it’s ARV.
However, I also feel like it’s kind of hard to turn up my nose at a 29-41% CoC return with only $10,000 down, even if that does mean I’m not getting the property at the best price. And even though I don’t expect any decent appreciation out of the property at all (not based solely on the neighborhood, but also largely on the regional rust belt area), I do plan on holding the property for 15+ years, so perhaps it’s not the worst deal in the world.
The inspection report we had done on the property reflected a couple areas that would need updated in due time, primarily a new AC condenser and a new roof. As it’s currently 15 degrees outside, the AC condenser can wait until next spring, and so can the roof as well. Pretty much all of those major expenses can be covered via the rental income the property will make, but it was frustrating that the seller was unwilling to budge. I know that if I do decide to back out though, there is a list of potential buyers waiting in the wings to swoop in.
Oh, I guess there’s also the fact that we’d be decimating our savings to buy the house, which only has about $8500 at the time of writing this post (looking forward to payday this Friday). However, considering it wouldn’t take us too long to save it up again since we’re now able to sock away $4000/month, maybe it’s not the craziest risk.
Seriously — Thank God we live in a LCOL with a cheap mortgage and great paying jobs.
Anyway, I’ll think it over a bit more tonight and make my final decision tomorrow, although I’d love to know what others might do in such a situation.
~ Alex
Neurotic Finance 