I think I found a deal! Now what?

19 Replies

Okay BP friends - I need your help...

I think I stumbled upon a great opportunity but I would like to hear everyone's opinion and perhaps whether there is anything I am missing.

This is a 4 unit building consisting of studio apartments at 336 sf per apartment (basically shoeboxes). It is walking distance to a university which makes me nervous since I remember what I did to my college apartment (not at all proud of it but this was 10 years ago).

All 4 units are occupied so I don't think I need to do repairs and I won't need to look for tenants. They are renting at $450-$475 each for a total of $1,875 per month, although I think I could raise the rent and the contracts are almost up.

HOA fees are $1,152 per month which sounds extraordinarily high to me but it says that outside repairs (such as the roof) are covered. Real Estate taxes are $50 per month (is this the same as property tax)? Total expenses listed are at $14,424 annually with $22,500 in income for a net of $8,076, $673 monthly.

The property is listed at $89,000. I could probably raise the money for a $10,000 down payment as a loan from my 401(k) which would eat up $200 per month from cash flow since I have to pay it back. Also, I would need to finance the remaining $79,000 and there goes my remaining cash flow. 

Still, if I were to break even to eventually own the property flat out or raise the rent such that I am producing monthly cash flow, does it sound like a good deal?

Or perhaps there are other options I am not considering that would not kill my cash flow.

I appreciate any advice, guidance, suggestions or warnings anyone can offer. I'm excited but I don't want to do anything stupid.

Thanks everyone!

@Andrew Bondarchuk , it is probably just as well that you remember your own student indiscretions when contemplating repair/maintenance costs for this one. And it is also likely that your VACANCY costs will be higher than you might have allowed for?

Taking on a project like this that MIGHT eventually give you a positive cash flow in the sweet bye and bye (but continuously drains my wallet for goodness knows how long in the meantime) does not sound like any sort of a deal to me. Just my 2c. All the best...

Updated about 6 years ago

..."continuously drains YOUR wallet"... Andrew, in response to your question below, sorry, I don't have the loan/finance experience you are asking about. Cheers...

Hi @Brent Coombs - thanks for the comment! It does make me nervous that I would probably just break even with two loans to pay - if something came up I would already be stretched too thin. Do you have any experience with the FHA 203(k)? 3.5% would be an out of pocket cost of $3,115 which I could raise without taking the 401(k) hit. At a decent interest rate the payment may come in under $500 monthly producing a little less than $200 cash flow. Still not ideal, but do you think doable or too risky?

Total rent = 475*4*12 = 22800

Mortgage (96.5% of 89000 4% interest rate) = 410*12 = 4920

HOA = 1152*12 = 13824

Taxes = 50 * 12 = 600

Expenses so far = 19344

You are still missing PMI (if you use FHA loan), Vacancy, Maintenance and repair, property management from your expenses. I don't see how this could be a deal. Am I missing something here?

Hey @Pingal Sapkota ! I didn't think of PMI. No, you're not missing anything, I've just never invested before so I'm relying on the collective experience and knowledge of the BP community for guidance. I appreciate your contribution. :)

For PMI, I guess there goes another $150 per month. I could raise the rent by $50 per unit for an extra $200 per month. In your analysis I would have roughly $300 cash flow + $200 from raised rents - $150 PMI for $350 cash flow. Does this sound like a wise investment? Is this a deal?

That HOA fee is outrageous. The HOA fee on my condo is 247, and guess what? Outside is covered. What about insurance? HOA don't normally cover inside the unit and you should at least have liability.

Maybe if you can somehow get rid of the HOA or got it for 20k lol.

@Andrew Bondarchuk

That HOA fee is a deal killer. Unless I read your post incorrectly, 62% of your total possible gross income is going to the HOA. What about Vacancy? CapEx? Repairs? PM Fees? Forget about it. This property is almost at negative cash flow before you even account for debt service.

Unless the rents for this unit are significantly below market which would allow you to raise rents significantly (double them?), this wouldn't be a deal if you were getting the property for free.

-Christopher

Thank you all. This is what I need to hear. I was trepiditious to begin with and now I am assured that this is not a good idea. Those HOA fees really are exorbitant, I thought it was a typo. I will keep on looking and the next one that comes along, I will again rely on you fine folks to steer me in the right direction. I appreciate the outpouring of support! :)

I could be way off but what is the zoning in the area? Could you repurpose the space and possibly eliminate the HOA at the same time? I would try everything I could if it led to cashflow.

@Ashley Guzman - I don't believe so. The HOA pays for the neighborhood amenities such as the gym, community pool, boat ramps, fishing piers, water and sewage services, etc. The units in that area were designed for housing of college students because it is so close to the university, it is actually walking distance. I wouldn't know of a way to repurpose the space, but I am certainly eager to hear any suggestions! :)

@Andrew Bondarchuk if I were you I'd call to see if that HOA fee is indeed listed correctly. If it turns out it was a typo and is actually $115.20 as opposed to $1,152.00 per month, then that would give you a lot more room.

Even so, I'd be very hesitant to buy anywhere that has a HOA. There are too many horror stories on BP that I wouldn't want to get involved with it. Best of luck!

Tyler.

p.s. I totally second your college comment. haha. The way I see it, it actually gives us an advantage...because we know what tenants are capable of :-) 

Originally posted by @Tyler Flagg :

@Andrew Bondarchuk if I were you I'd call to see if that HOA fee is indeed listed correctly. If it turns out it was a typo and is actually $115.20 as opposed to $1,152.00 per month, then that would give you a lot more room.

Even so, I'd be very hesitant to buy anywhere that has a HOA. There are too many horror stories on BP that I wouldn't want to get involved with it. Best of luck!

Tyler.

p.s. I totally second your college comment. haha. The way I see it, it actually gives us an advantage...because we know what tenants are capable of :-) 

Yes, definitely not proud of it. It was a second floor apartment and we kept a keg in the corner of the living room and kept changing it out whenever it emptied so needless to say there was a lot of woodrot to replace. One wall of the apartment was basically a dart board. We drew the target on the wall and everything. We caused roughly $8k in damage but the good news is the landlord took us to court and he was awarded all the damages. At least he wasn't out of pocket - he was even paid for the legal expenses. He also let us finish our lease out because we were paying rent so we didn't end up with an eviction on our records. Great guy! 

The landlord/tenant threads are some of my favorites and it doesn't look like this is the usual outcome, unfortunately.

Total rent = 475*4*12 = 22800

Mortgage (96.5% of 89000 4% interest rate) = 410*12 = 4920

HOA = 1152*12 = 13824

Taxes = 50 * 12 = 600

Expenses so far = 19344

You are still missing PMI (if you use FHA loan), Vacancy, Maintenance and repair, property management from your expenses. I don't see how this could be a deal. Am I missing something here?

--------------------------------------------------------------------22,800 - 19,344 = $3,456

Repair and Maintance has to be at least -$1,200?

Leaving you + $2,256

Vacancy -$465  = +$1,791 or 2 months  minus another -$465 = + $1,327

How old is the property and what are the capital improvements costs?

So unless you can get this for less money and unless you can raise the rents soon.  If you raise it $200 a month that would give you $3,520 a year cash flow and if you raise it another $50 a month =  +$4,120 a year positive cash flow 

These number are without figuring in a PM. this is also without PMI costs. What would the PMI cost over the 12 months?

Well you ran the numbers here so your next proposed deal will be much esier to figure

andrew. NO, i would not make this deal. did you get into RE to break even? think about the HOA fees. are you willing to hand over 2-1/2 units rents for each month just to have someone guarantee to fix the roof or siding? these are things that you can do yourself and probably would not need much attention most of the year anyway. so, you are throwing money away for nothing every month. have one of those units go vacant for a month and you loose all of your profit, if there even is one anyway. if there is not profit with it fully occupied, you are going to be shelling out money from your own pocket if one goes vacant. i wouldn't walk away from this deal......... i would run. there are better deals out there.

Im in the rehab phase of a 203k. let me know if you have any questions.

3.5% is the MINIMUM contribution required to close a 203k, but isnt at all what you actually NEED to close. You have to figure at least another 6% of the total loan amount for closing costs. Dont let people fool you into thinking that 3.5% is all you need!

Andrew Bondarchuk For this money you would better find SFR with no HOA fees and making some money plus appreciation Find wholesalers in your area