How About This Deal?

Question

4-unit deal

Purchase Price $105,000

Unit 1: 425 2/1
Unit 2: 400 2/1
Unit 3: 375 1/1
Unit 4: 475 1/1

Monthly Tot Rent: $1,675

OwnExp: Insurance, Lawn, Maintenance, Taxes

Year Built: 1920

ALL UNITS HAVE BEEN COMPLETELY REDONE. A GREAT CASH COW! THINK OF THE INCOME POTENTIAL. ALL APPLIANCES TO STAY. COIN-OP WASHER AND DRYER IN BASEMENT TO STAY. 2 CAR GARAGE FOR EXTRA INCOME.

Jon Holdman · Answer

Yes, exactly.  It depends on what your goals are.  If you're just trying to make a living off rentals, and are willing to do the management, you can earn some income from the property itself, some from being a property manager, and (if you want) some from doing maintenance.  But, Mike's exactly right.  The return from the property should treat management and maintenance as expenses.

Jon

Michael Rossi · Answer

versacorp,

No, properties with a 7-7.5 cap rate do NOT cash flow and are not good deals.

This is not a good deal.  A cash flow of $40 per unit per month is quite low.  If you're going to buy out of your local area, you can do much better and you NEED to do much better as there is more risk long distance.

Expenses: $670 (40%, self managed) 
NOI: $1005 
Cash flow: $328
  
I would just like to disagree with Wheatie here.  The expenses are not reduced to 40% if you self manage.  The only thing that happens when you self-manage is that you are getting paid for doing the management job.  The management expense still exists, just the person that gets paid for it changes.

Good Luck,

Mike

Troy Lei · Answer

I have 3 cash flow properties right now in  bakersfield california that i am selling. Is a 7.25 - 7.5 CAP rate cash flow? I could be wrong but I believe they do. Lately I have been finding ALOT of them. unit prices are in the area of 70 - 75k per unit and onthly rents are in area of 650 - 750. year built  two are built in 70's and one in 80's. 
would these be considered deals or just OK.

Eric Foster · Answer

As far as the terms to offer the seller... The less interest the better!

I like to ask for a balloon payment with the interest calculated up front (simple interest not compounded interest), and no monthly payments. This makes it cash flow better every month.

P.S. I don’t think Countrywide will let you have a seller carry a 2nd to 100% of the value!

Jason Jones · Answer

So Countrywide will offer me 90%, but with PMI.

$574.19 P&I
$781.47 PITI + PMI

If I only get an 80% LTV, then:

$510.39 P&I
$646.01 PITI

30 year fixed at 6.125%

I'm thinking it would be better to have the seller carry back a 2nd on 20% to avoid the PMI & still make the numbers work.  I'm thinking $21,000 @ 8% for 7 years ($328).

Does this sound ok?  Is that a fair rate/term to offer the seller?

Jon Holdman · Answer

90% for NOO properties is actually pretty good.  80% is more typical now.  You'll have to find some other way to cover the down payment, closing costs, and other costs.

Another alternative is to do hard money or some other sort of rehab loan to get into the property, then fix it up, lease it up, and refi.  I've been told you can do rate-and-term refi's up to 90% of a new appraisal for a rate and term refi, 70% if you want any cash out.   Trying to finish this up now, so we'll see what really happens.

Jon

Jason Jones · Answer

The seller was open to carrying back a 2nd.  I'm thinkin countrywide for the 90% and have the seller carry back the 10% - I'll cover closing cost.

What would be a good offer for that seller 2nd?

$10,500 5 years @ 9% ???  I don't know what the going rates are.

Jason Jones · Answer

#1 - This is NOT in California.

I have yet to find positive cash flow properties here, and that's with 0% expenses :), let alone 50% expenses.

I like what I'm seeing... time to see what I can line up on financing.

Jason Jones · Answer

Anybody know of a place to get some good financing?

I've got 2 properties currently waiting on financing, plus this 3rd prospect.

Verified income, credit scores of 800+/-, all units cash flowing, no personal debt, over six figues in retirement accounts, etc.

Countrywide is offering 90% LTV on investor loans, but I'd love to get 100% (or combo some loans to get there).  I don't have a lot of capital since I'm just starting out, so I'm trying to limit what I have to put in the deal.

Any ideas?

Gary Dayton · Answer

Wow....I don't understand where you found a deal like that in CA!

But the 2% rule shows $2100

$815 (Mortgage Pymnt of $630 (ish) 6%, Taxes of $105, Insurance $80 ish)

$815  + $837.50 (50% of rent)= $1652.50
$1675 rents-$1652 = $22.50

If you keep maintenance costs down to $837.50 per month you have a cash flow of around $22.50 = $5.62 per unit?

And depending on the Laundry income you can beef it up some.

Honestly I don't think the 2% will work in CA but if my figures are correct then you have cash flow  :D