Would you do this deal?

Question

Ok, I'm not actually going to buy but, I've been looking at this site excessively, and decide to give my valuation skills a go. After a few days of going over properties via, realtor sites, craiglist, etc studying the market I will invest in I ran across this.

4 unit building(really 5 units but 5th is unfinished) Sales price $89,900 Apprasial Value 109k

All units have been rehabbed fully. New energy effecient furnaces, rehabbed kitchens with hardwood floors, new bathrooms.

100% occupancy.

Gross Rents $2250 PITI 69k @ 8% over 30 years is $1006 NOI is $1244 Expenses $1125 Positive Cash Flow of $119

Claims contractor says 6k to get the 5 unit going and could rent it out at $500

Would this be a winner or loser? This would be a property I would go and check out as a newbie, if I were buying.

Account Closed · Answer

Nice deal

Best of Luck!!

Aly W. · Answer

Attorney review in NJ is for evaluation of the contract terms, ordering of title work, surveys, the closing, etc. Different attorneys charge different amounts, in this area it's generally $900.

I'm looking for Section 8 tenants once we close, and the average FMV rent for that property is at least $1000. The house can actually be 4 bedrooms since the attic is finished and just needs a closet.

Tom C · Answer

Attorney review? What is that for and how much is that costing you?

Your first deal sounds good, your second deal I wouldn't touch. 60K for a SFR rental property @ hopefully $900 per month sounds pretty risky.

Aly W. · Answer

Thanks all. The area is decent, a working class section of Trenton. We're in attorney review right now.

Rajendra Mackinley · Answer

fortunately this is a good deal especially if the area or surrounding is good too..

Michael Rossi · Answer

Aly,

Throughout the United States, operating expenses run 45% to 50% of the gross rents. I don't try to break down the individual expenses for a given property in a future year because that is impossible. How many evictions will a given property have this year? Will a tenant in a given unit sue you this year? How many months vacancy will you have in a given unit this year? All impossible to answer.

I understood that you will be putting down 20%, but is that 20% free? Isn't there a cost to putting 20% down?

Taxes and insurance are part of the operating expenses.

Good Luck,

Mike

Mike Sales · Answer

Aly I think the conventional wisdom, is operating expenses are generally 45 to 50% of gross rents.

Aly W. · Answer

I'd like to run this deal's scenario too. I'm going to look at properties similar to this.

Purchase price $60K (3 bedroom/1ba) Mortgage of $48K (7.125%, 30yr) Taxes $2015 Insurance $600 per year Maint/Expenses approx. $1500 per year (could be less, property is in good shape)

Rent would be at least $900 a month (property is currently vacant, tenant could potentially be signed to a lease prior to closing)

NOI - Gross rents $900 - Operating expenses $343 = $557

Cash Flow - $557 - $343 (mortgage) = $214

Thanks, Aly

Michael Rossi · Answer

This is a good deal, but your evaluation is wrong.

NOI is defined as Gross Rents - Operating Expenses. Therefore, NOI would be $2,250 - $1,125 = $1,125

Cash flow is determined by subtracting the mortgage payment (principal and interest only) from the NOI. If the mortgage was based on $89,900, 30 yr, 7%, then the payment woulc be about $600.

Therefore, the cash flow would be $1,125 - $600 = $525.

Good Luck,

Mike

Michael Rossi · Answer

Aly,

Your operating expense numbers are fiction. Operating expenses of $450 per month would be more realistic.

Here is how I see this deal:

NOI: $450 Debt: ($60K, 30 yr, 7.125%): $404

Cash flow: $46 per month (a little low in my opinion)

Mike

Would you do this deal?

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