What if? Analysis.

Question

Hey Everyone,

I just got off the phone with a seller of 2 duplexes next door to each other 4units total. C...D area. According to seller excellent condition. They are 4 1/1s and gross income is $2k/month ($500/pc). It was really hard to get comps because according to seller both duplexes are under one folio# for tax purposes. I am guessing ARV is ~100 to 120k. (there were no sales comparable) I was really conservative with my offer. I offered the seller 3 scenarios.

1. cash offer 40k . I really want to be as creative as possible with as little of my money in the deal. 2. Conventional. 60k 3. Seller Financing...85k (I didnt specify terms).

The seller was offended that I offered 40k cash. He almost didnt let me finish my other 2 offers. He said he would not take less than 175k. I was thinking after I hung up with him.....If I could get NO MONEY DOWN and my terms 0% int.....maybe I can give him his price.

I was running the numbers and if I could get my terms....

Mortgage $180,000.00 Mortgage $500.00 Taxes 360 Insurance 140 Maintenance 60 prop mgmt 300 (overestimating) ($1,360.00)

Gross Income 2000 NET $640.00 $7,680.00 /yr CASH ROI 1.54 CAP 0.0768

If I could somehow get my terms even though i would be overpaying by alot for the prop...I would be having a couple hundred a month cash flow $640. Making money on the other guys money.....infinite amount of ROI. Am I crazy thinking this can actually work even though I am overpaying? My goals now....CASH FLOW.

I understand I didnt account for vacancy. Seller says guy across the street is charging $650/month and has vacancies (Speculation). Seller says he keeps his units full all the time and all tenants have been there for years. I checked on rentrange and the low end seems to be about $600 month within a 1.5 mile radius for an apt 1/1.

Steve Babiak · Answer

Or you can raise the rents in smaller increments where the tenants are more likely to accept it and stay. But it might take 3 or 4 years to do that by raising the typical 3% to 4% per year ("cost of living" increase basically), and then some of your expenses will also have increased in that time too.

Will Barnard · Answer

Mike,
hat everybody is trying to point out to you is that you can not make a bad deal a good one simply with great financing terms. Bottom line, you need to educate yourself on ALL the costs associated with buying and holding, then go out and find yourself a great deal. This is not the only opportunity that will come your way, keep looking, keep educating yourself.

Brian Levredge · Answer

You will lose on this at 180k. Your expenses in the long run will be 50% (you didn't even have vacancy in your assumptions) which eats up 1k of the gross right there. That leaves you 1k for debt service and profit. 180k @6% is $1079 per month. I wouldn't give those terms so you are probably looking at a higher rate. Don't massage the numbers to fit a desired outcome. Assume the worst and work from there.

Will Barnard · Answer

You are leaving out quite a bit of expenses you will incur so your cash flow projection is way off.

If you get $2k a month in gross rents, you cant pay $180k, regardless of terms and expect to have consistant cash flow. You must factor in vacancy, capital expenses, repairs, evictions, legal, advertising, accounting, etc.

For a 4 unit property, the easiest way to calculate your cash flow and your max offer is this: If gross rent = 2,000, then max offer should be $100k.
If gross rent = $2k monthly, your expected monthly expenses (including capital and vacancy) should be $1000 (50% of gross)

Account Closed · Answer

did you call seller, or did he call you??...big difference...he doesn't sound very motivated. it will be difficult to get 0% financing bc the IRS assumes he earns interest, so in effect he'll pay taxes on the interest he doesn't charge you..if you somehow do convince him to take back 0% financing i assume he would put a balloon in place..meaning, in 5 years you'd still owe 147,000. when you do have to refi that loan, it doesn't sound like a winner to me bc you'll have a payment of 1,139/month (assuming today's interest rate of 7%). with the 50% rule, you will be losing money each month

Account Closed · Answer

what happens if a toilet breaks, a roof leaks, etc..you get the idea. there's a lot more to cash flow than "rents minus payment"...check it out in the rental section

Bill Gulley · Answer

No amount of creativity will make up for not having a good foundation of real estate knowledge. Start with the basics, IMO, those are shots in the dark hoping to hit a deal.

Will Barnard · Answer

Good point Steve. Duplex units and other rentals have valuations usually based on the income approach and as such, your intention to "flip" should not take into consideration rental increases could cause the problem Steve pointed out. If you are confident that some other investor would pay $165k for a duplex that has a gross income of only $2000, then you have a deal at $130k, if not, move on.

Michael C. · Answer

Thanks guys. I am just looking for a creative way to acquire using the other guys money. My logic was....hey I am going to get an extra $640/month using his money. He has below market rents by ~$125/ unit. According to the seller the prop is in excellent condition.

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