BiggerPockets

I came across a possibilty I saw and am currenlty waiting on some info from my real estate agent. Just looking to run this one by you guys.

Legal 2 family with Fire damage upstairs and "extensive" water damage. (According to the listing agent, it's not bad but I haven't see it yet).

Waiting on property taxes but it's around $6,000 - $7,000 per year.

The house has a Life Estate tenant where the woman lives in the bottom apartment until she passes away Rent Free. She is 86. Lots of Section 8 in the area.

They are only accepting cash offers becuase the house is not mortgagable in it's present condition. Tenant is living in Florida until repairs are done in her apartment by the new owner.

There is one offer for $135,000. My agent sold a 2 family on the same street for $292,000 four weeks ago. I can't estimate the repair costs site unseen.

1st floor - 1 Bedroom - 1 bath (Life Estate Tenant)
2nd floor - 2 Bedroom - 1 bath (Will be able to rent this one)

Rents in this town for a 2 BR go for about $1300 - $1400. I'm waiting on more details but just wanted to get some thoughts for now.

Thanks all!

I should have added that I've seen some pictures. Structurally, it looks ok. I would be doing some of the work myself. I would get someone to do the roof and siding. The rest I would be involved in.

I ran some numbers and after repair, I would just about break even renting the 1 apartment. I've estimated loan payment, taxes, and insurance to be $16,117.64 per year. Renting just the one unit for $1300/month, which would give me an annual income of $15,600? This would be my first REI and I would also be creating an LLC. The $518 difference each year would be offset by depreciation and other business write-offs and tax benefits.

Assuming I would rent the 1 BR for $950/month after she passes, my annual income would jump to $27,000 with all expenses being the same. That would give me a positive cash flow of $10,882.36 per year. Since I'll be doing most of the updates now, maintenance for the first 10 years should be minimal.

Now, like I said, I haven't physically seen it yet. I've only seen pictures. If it costs me $50,000 - $75,000 in repair costs, I could handle that. Of course, repair costs could skyrocket if there are problems that have not been mentioned. That would be determined by a visit and a home inspection.

Given my description above, isn't it worth a visit?

You should go read the thread in the landlording forum that discuss the "50% rule".

You're deeply in the hole, much more than the $518/year you think, with just the one unit. I calculate the payment on $200K (purchase plus fixup) at right at $1330/month or $16000/year. You would have to calculate expenses based on the total scheduled rent, which would be about $2250/month. If you assume an optimistic ratio of 40% for expenses (because you're managing it yourself and you have no "vacancy" on the unit with the lady), that's $900/month. But, you actually have 100% vacancy on that unit, so that's another $950/month in expenses. That puts total expenses at $1850/month vs. a gross rent of $2250. That leaves you $400/month in NOI. Or, if you prefer, you have rent of $1300 , actual expenses of $900, leaving you the same $400 NOI. Your payment on $200K is $1330. So, you're in the hole $930/month until she dies. Then, you're only in the hole by about $30 assuming reasonable vacancy on the 1BR unit.

Yes, I realize you seem to be implying you'll finance only the purchase price and will pay the rehab out of pocket. So, you're payment is $900/month instead of $1330. So, for now, you're only in the hole $500/month. And you're earning exactly 0% on the $75,000 you have invested.

Where's the possible upside here?

You can't sell it for a decent price until she dies. So, the comp is interesting, but not very relevant.

Do you really want to put yourself in the position of having to hope someone dies for your investment to work out?

I've read numerous posts concerning the 50% rule. There are many ideas and opinions on how to figure it. Out of what I've read, this is how I understand it; correct me if I'm wrong.

You figure 50% of the gross scheduled rent. Let's assume your monthly rent is $1500/Month.

50% of $1500 = $750/Month

Your total expenses should not exceed 50% of gross rent ($750 in this case per month).

Your expenses (not to include your mortgage payments) include:
Maintenance
Property Tax
Insurance
Operating Expenses
Vacancy
Advertising
Tenant screening
Tenant Damage
Legal Fees
CPA Costs
Business Entity costs
Am I forgetting any?

If 50% of the gross rent covers your expenses and the other 50% is more than your monthly Mortgage (principal and interest), it's a good deal that will cash flow.

Like I said, I've read many arguments on the interpretation of this rule so I'd like to hear your thoughts. I know this is not an exact science but is a good starting point in analyzing a potential deal.

I'd be interested in reading some responses to see if I understand it correctly.

Maybe I should have started another post. My last post was just to see if I'm understanding the 50% rule correctly. I pretty much gave up on this property because I now see what you're saying and I value everyone's advice. It does seem like too much work and the months in lost rent while renovating will not be worth it. I'll keep an eye on it. Maybe the person making the offer will drop out and I can get it for much less.

Did I leave out any expenses to factor in? Are you using the 40% on the expenses or the mortgage payments? I'm also having trouble estimating some of the expenses I'm not familiar with like attorney fees, CPA fees, Tenant Damage, and maint.

Thank you for taking your time to share your knowledge with us newcomers. It is very much appreciated.

Thanks again. I have finally learned the 50% rule. With this formula, I am now convinced more than ever that I will have to invest somewhere other than Long island which adds a management company expense into the mix. Which isn't that bad considering taxes and housing costs are much lower.

Thanks!