Simulation: a fictional property for practice.

A $265,000 rental house: would you buy it?

A dated 3-bedroom listed for $265,000. The seller says it rents for $2,300. Value it, price the repairs, run the numbers.

A fictional house in a fictional neighborhood, bought with a regular investment loan.

• Asking price: $265,000
• House: 3 bedrooms, 2 baths, 1,500 sq ft, built 1998
• Seller says: Rents for $2,300 a month; “just needs paint”
• Your loan: 20% down ($53,000), 7% for 30 years: about $1,410 a month

Mission 1: What is it worth?

Which recent sales would you use to value this house as it is today? Pick all that fit.

• Sale A: $272,000 (3 bed, 2 bath, 1,480 sq ft, built 1997, average condition, sold 2 months ago, 0.4 miles away)
• Sale B: $268,000 (3 bed, 2 bath, 1,550 sq ft, built 2000, average condition, sold 4 months ago, 0.7 miles away)
• Sale C: $395,000 (4 bed, 3 bath, 2,300 sq ft, built 2006, fully remodeled, sold 1 month ago, 0.5 miles away)
• Sale D: $240,000 (3 bed, 2 bath, 1,500 sq ft, built 1998, poor condition (no working air conditioning, kitchen torn out), sold 14 months ago, 0.3 miles away)
• Sale E: $205,000 (3 bed, 2 bath, 1,510 sq ft, built 1999, bank sale with fire damage, sold as-is 3 months ago)

Value comes from the best evidence you have: sales of similar homes nearby, in similar condition, as recent as you can find. When you must use an older sale, adjust it for how the market has moved since. Here Sales A and B point to about $270,000, so at $265,000 you’d be paying nearly full price for a house that still needs work.

Mission 2: What will it rent for?

Which monthly rent would you plan on?

• $2,300 (What the seller says, and what a similar house is advertised for online)
• $2,000 (Two similar houses nearby rented in the last 3 months for $1,950 and $2,050)
• $2,600 (A 4-bedroom with a pool around the corner)

Use rents that were actually signed, for similar homes, not asking rents or the seller’s number. $300 a month of wishful rent is $3,600 a year that never shows up.

Mission 3: What will the repairs cost?

The inspection found the items below. Enter your total repair budget before you look at the example ranges.

• Roof: 21-year-old asphalt shingles, near the end of their life
• Air conditioning and furnace: 14 years old
• Water heater: 9 years old
• Flooring: damaged in most rooms
• Kitchen: dated but working

“Just needs paint” was really $22,500 to $53,500 of work. Price what you can’t see too: the roof and the HVAC are the expensive surprises. These ranges are examples; get written bids from qualified contractors in your area, licensed where your state or the trade requires it.

Mission 4: Run the numbers

• Rent (assumed from rented comparables): $2,000 a month
• Vacancy and unpaid rent (assumed 6%): −$120
• Property tax and insurance (assumed): −$275
• Repairs and upkeep (assumed 8% of rent): −$160
• Property management (about 9% of rent collected): −$170
• Net operating income (NOI): income after operating costs, before the loan: About $1,275 a month
• Reserves for big items like the roof and HVAC (assumed 8% of rent): −$160
• Debt service: the loan payment, principal and interest: −$1,410
• Cash flow: what’s left after NOI, reserves and the loan: About −$295 a month

With realistic rent and costs, this house loses about $295 a month before any of the repairs, and you’d have $53,000 down plus $22,500 or more of work in it. It only works at a much lower price. Try it in the rent calculator.

At $265,000, what would you do?

Buy, investigate or pass? Work through the drill to see what an experienced investor would weigh.