BiggerPockets

I find rentometer to be on the high side. So, basing your assessment on the existing rent is a good idea.

Be sure you actually do see the other unit before you make an offer, or make the offer contingent on seeing the unit.

Get the tenants to pay the water AND take care of the yard.

I calculate P&I at $864. So, at that, its just about break even with you managing it yourself for free. Your call if you think that's acceptable.

Wheatie,

Thanks for your reply. The reason I included a breakdown of the expenses is to show that there is a little room to make profit. Am I correct to assume a 10% vacancy when these renters have been in place for over a year and show interest in continuing to stay or can that be reduced to make room for profit? Plus if I ask the tenants to pay water and do the lawn wouldn't that jeopardize my occupancy rate? Are my maintenance estimates high? Are you basing your calculations on the 50% rule? If this is based on the 50% rule then I don't think this is a wise investment. But if I can somehow use the real numbers then I think this may be a decent deal. Should I lower my offer to reflect a $100 per door cash flow based on the 50% rule?

Also, I am putting this offer with an " and or assigns" clause. Just in case my due diligence returns an unfavorable profit margin for me I can wholesale it. If I can get the deal at $130,000 my plan is to take on a partner (out of state family member) who will inject the down payment and I will manage the property for them locally. Which means I need this to cash flow with the management fee included. My other option is to wholesale it for a couple grand profit. What do you think? How can I make this into a deal?

PM_Broker

Monthly expenses:
Taxes = 109
Insurance = 113
Water/Sewer = 100 (tenants take care of (very small) lawn in lieu of seller paying water)
*Management = 100 (paid to me)
*Maintenance = 150
*Vacancy (10%) = 150
*Total expenses = 722

You left out a bunch of expenses. For example, damage done by tenants in excess of the security deposit, legal fees, evictions, capital expenses, advertising, etc, etc, etc. So, if the numbers above are correct, your actual operating expenses may be ABOVE 50% of the gross rents.

Just for the purposes of evaluation, let's assume that the operating expense will be 50% of gross rents. Here's how I see this deal:

Gross Rents: $1,500
Operating Expenses: $750
NOI: $750

Mortgage Payment ($130K, 30 yr, 7% NOO): $865

Monthly Cash Flow: $115 LOSS (OUCH!)

In my opinion, this is a TERRIBLE deal and I wouldn't do it. The purpose of running a business is to make money - not lose money. How will you make money on this deal? Even if you use a down payment, that money isn't free and the opportunity cost should be accounted for.

The reason I included a breakdown of the expenses is to show that there is a little room to make profit.

You're 100% right! There is NO PROFIT and as I explained above, you didn't even include all the expenses.

Mike

Mike, do you use percentages for the expenses you listed (expenses I left out) to evaluate your deals?

No, I don't try to break down individual expenses because it is just about pointless. How many evictions will you have in this duplex this year? Will one of the tenants file a lawsuit against you? Will one of the tenants get mad at you when you won't allow them to pay the rent late and do a lot of damage to your rental? Will the coming economic downturn cause a lot of excess supply in the rental business (due to distressed homeowners renting their houses) and cause vacancy rates to increase? Will a downturn in the economy cause people to lose their jobs and evictions to rise? What numbers will you put on these very real expenses?

I use the 50% rule and understand that over time and a number of rentals, the operating expenses will come out to about 50% of gross rents.

Mike

Not only can you talk to the current tenants, you should get an " estoppel letter" from them that reiterates the terms of their current leases. That avoids a situation where there is a written lease in place, but a verbal deal that's different and the tenants expect you to honor the verbal deal.

Given a chance, I always try to talk to the tenants about the place. Helps you get a feel for them, too.

Closing costs, plus anything you have to spend to get it rentable go into the acquisition cost. I would throw those in with the purchase price when evaluating a deal.

Also, if you are putting in down payments, you're cheating yourself if you say " at 100% financing, its not a deal. But if I put in 30% down, I get $100/mo cash flow and it is a deal." No, you're just putting in the down payment and getting a return on that. Assume 100% down and be sure its a deal. Or, do a " cash on cash" calculation to see what return you getting on your investment.

I'm sorry I keep stretching this but I still have a couple more questions. See if you agree ... If this is acquired through financing, I would skip the first months mtg payment and therefore the first months profits can be added into my yearly profits or towards expenses.

Yes, you can do that. However, just don't delude yourself that it changes the character of the deal. If you're successful, you won't just own this property for just one year and next year you certainly won't be skipping a mortgage payment. Personally, I wouldn't allow that to enter into my cash flow analysis.

Not only can you talk to the current tenants, you should get an " estoppel letter" from them that reiterates the terms of their current leases.

I agree 100% with Wheatie about the estoppel letter, however I do the estoppel letter a little differently. I make the previous owner sign an estoppel letter on the theory that the owner will have something to go after as opposed to the tenants who usually don't. You might even want to have both the tenants AND the owner sign an estoppel letter. Of course, you MUST also get a copy of the leases from the previous owner because you are buying those leases and their terms. I always do a criminal background and eviction check on the tenants before I buy to see who I'm getting.

Good Luck,

Mike

Hi Wheatie.
My 1st deal that I closed was a 7 unit Building for 155,000 and after exp is bring in a cash flow of 1,300.00. I also put a good Excel spread sheets that calculates your risk and shows you the bottom line. I am located in Ohio and I am working with a seller on negotiating on price on a 10 unit building in the ball park of 200k and a ruff guess of 50k in repairs needed. (What I do as well as manage the property. I am in Ohio.

[EDITED BY MODERATOR - Solicitation aspects removed]

The Repairs are most like less than 50k. I just like to over guess to be on the safe side. Believe it or not I use to live across the street from this place and I was renting at 500$ a month 3 years ago before I bought my house. Also Next year the place I am talking about will be the #1 spot for employment allot companies are building up around the area so that is good news. I am new to the Real-estate aspect but not new to make deals and working with companies. My 8-5 job is a Business Coordinator For Verizon Wireless. About the last remark I was not trying to sell anything so if I came across that way, I apologize.

Thank you all for your replies.

I have decided not to pursue this property as my appraiser told me it may be only worth $100k based on recent sales for similar properties. I have asked my Realtor to propose that the seller reduce her price due to the value of the property likely to return $50k difference in asking price and market value. The seller is reluctant to lower the sale price to less than $145k. According to the sellers Realtor, this is not a distressed sale. I believe it is - why would anyone want to sell in a down market especially if she has both units rented out?

I will wait a couple of months and try to present another offer if the property is still available.

What Mike said, plus....there are crazy deals in the SFR market right now that I just haven't been able to find in the multi market. I'm trying to sell my multi now at about 70fmv to reinvest in multiple SFRs.