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DeaL Analysis

A few weeks ago, we reached our initial fundraising goal. We are always interested in new teammates but have now transitioned focus from setting up and funding 210 Holding Group to the next step--actually going out and finding a property to purchase and rehab. A few nights ago, I received an email with a potential deal from a wholesale agent we are working with. Within the hour, I had conducted analysis and thought it was worth a look. I texted Dan that night and the next morning, Dan walked the property. Within 18 hours from recieving the email, we put in our first all cash offer for a property--we did not get it, but it was a great opportunity to share the process we went through to narrow down potential deals.

8:48 PM, 22 Jul - I received an email for 7461 Mytrle Trail, a 3 bedroom-2.5 bath, 2500 sq ft house near Randolph AFB, Texas. The property was being offered at $129K--Zillow and Realtor websites were showing the value around $187K so it was intriguing. It was a newer build (1991) which often means less risk in the rehab than with older homes, it was in a good neighborhood with low crime, and with its promixity to Randolph AFB, we figured we would have good access to high quality military renters. It definitely looked like a property we would like to have in our portfolio, so I dived deeper into the analysis to see if the numbers could work.

Rental Comps & ARV

With our strategy, we are aiming to purchase a property at a price that will enable us to complete the rehab and add enough value that we can immediately refinance it and get much of the money we invested back out. Once we have a loan on the property, we want the rental income on the property to result in positive cash flow after all expenses are taken into consideration (ie loan payment, property taxes, vacancy rate, maintenance reserve, etc). Therefore, a good review of rental comparables and estimating the After Repair Value (ARV) are the first steps in determining if a property is worth a look.

For rental comps, we took a look at both the wholesaler comparables as well as our own independent analysis. We typically use the website Rentometer.com to review the average rental income for like properties in neighborhood. In the case of this property, the average rental comps were around $1300. Then, we deep dive into the actual list of individual properties that go into that average. We compare the size and features of those homes with the subject property. That helps us gauge our required renovation budget as well as zero in our likely rental income--for instance, if properties on the higher range of the rental market all have updated kitchens and tile showers, we know we have to budget for that to achieve like rents. In this case, based on the size of the house (2,500 sq ft--largest of any of the 3/2.5 comparables), our intended renovations, I actually chose to plan for rents at the high end of the spectrum at $1700.

Figuring after repair value--how much the property would be worth after rehab was the next step. This was difficult with this property. The wholesaler package provided a list of sold rental comps that ranged from $83-$87 per square foot--that would put the ARV of this property at up to $220K. However, those rental comps were based on houses with 4 bedrooms. This property was essentially the biggest 3 bedroom house in the neighborhood--with more square footage than many of the 4 bedroom houses--but it was still a 3 bedroom. The current value listed by websites such as Zillow and Realtor had it at $75 per square foot ($187K). We figured after a rehab we would definitely add value but we could not be confident an appraiser would utilize 4 bedroom comparables. For the purpose of our analysis, we split the difference and went with an $80 per sq ft estimate of ARV at $200K.

With the rental estimate and ARV in place, we threw those numbers into a calculator to determine if this deal could meet muster. Since we are an LLC, we cannot use a traditional 30 year mortgage--we have to use 20 year commercial loans--we used a 4.125% interest rate for the purpose of this calculation. I also estimated the rental budget at $30,000 based on what I could see in the pictures--it would require Dan to walk the property to determine if the rehab could be accomplished on that budget. But based on my calculations, this project could net us nearly $200 per month in cash flow, give us an 18% cash on cash return, and $40K in equity. It was worth a closer look. I shot Dan an email at 9:00 pm and asked him if could see the property the next day.

Walking the Property

5:49 AM, 23 Jul - The next morning, Dan and I have a quick phone call and I go over the numbers, discuss the analysis and my inital thoughts on the $30K rehab budget. Dan reached out to our wholesaler, got the code to access the property and took a look.

Dan estimated the rehab would take about $40K versus the initial $30K I ran the numbers with. That being the case, we knew we could not take this property down at the $129K our wholesale partner was asking for the property. We offered a number that could work for us $115K. The wholesaler declined the offer but we look forward to finding a deal that can work for both of us in the future.

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