I found a property - its a small duplex.
It is two - 2 bedroom apartments
1st unit - paying $1,500 month
2nd unit - paying $1,300 month (not paying rent currently)
Total income $2,800
Tenants pay all of their own utilities
Land lord paying Taxes $3,300/year and water
Will need new paint, and some touching up.
Owner asking $575k
I am want to put an offer in, want to know if you experts out there could tell me if this is a good deal/bad deal and any input.
Thank you
Hello Isaac,
Here is how I would evaluate it.
$575-20% down= $460K financed. @6%= $2,760 per month
Total income $33,600 per year
- $8,400 (I figure -25% for management, vacancies & repairs)
- $33,120 annual payment
- $3,300 for taxes
- $ ?? water
- $ ?? Insurance
= $-7,920 already loosing money without water and insurance.
Do you have any good comps that would tell you the value? At first run of the numbers this does not appear like a good deal.
Hope this helps,
Ted
Hello Isaac! Not an expert by any means, but the deal at first glance seems to be a bit low on the cashflow side. The rule of thumb I've heard is 1% (at a minimum) of the purchase price should be the rental income coming in. Potentially even 1.5-2% if you want a very safe deal, which I'd assume you would want for your first deal.
It looks like you're at about .5% of the purchase price which seems a bit risky to me. Open to hearing what people with more knowledge have to say about this deal.
Hi @Isaac El - it depends on a lot of factors to determine whether this is a good deal or not. What is your strategy? Are you planning to do any renovations? Will this be a long-term hold? What is the current market conditions? Are the rents below market and are rental rates going up in the area?
The main risks I see here is the delinquent tenant in the 2nd unit. If I were you, I'd want to know how long they've been delinquent and whether you'll have to come in and evict them. Perhaps you might want to request that the seller deliver that unit vacant upon purchase.
While the deal doesn't look like a slam-dunk today, if there is market upside and you are able to de-risk it by having the seller deliver the 2nd unit vacant, it might worth seriously considering.
Hi Issac, I think you will want to break out the expenses in detail to evaluate whether the $2800 in income will cover all the inputs.
For example,
Mortgage - Principal and Interest payment
Property Taxes
Vacancy - i assume 5-10% depending on the area
Insurance - Landlord
Water
Property Management - if you are not in the area then you will need someone to manage this
If at minimum the above are covered a decision can be made at a high level to deep down into further analysis.
@Caleb Godsey - Hi Caleb I know its below the 1% rule, I am a beginner as well, but from what I see In most of New York City - the property prices vs rent income will be below 1% rule, but from the other end the properties really appreciate like crazy.
@Account Closed
Hi Shola, I would be looking to buy this at as a long term hold, and little by little keep adding more units. I see thats the strategy lots of other successful investors on here use. I know I have to do some renovations, not major ones. The market is very hot, this is in hot area, with property appreciating year over year. The rental rates are about at market rents.
The agent told me the deal fell through the first time - she told me the owner is an older person that is selling off his properties, they had a buyer before but couldnt get the tenant out in time and fell through. She was pretty transparent and said I would really have to evict the tennant, which I know is about a 1 year process.
Hi Amit, your right, and I didnt even think about insruance, but your totally right, I guess the best way is to work this up in an excel sheet. Also 1st floor tennant is a section 8 - does that open up more problems or make it better?
Hi Isaac....I am new to this as well since I haven't been in the US investing until just a few months ago. However, I know that Section 8 requires that you maintain a certain type of unit and have requirements that it should pass inspections. I personally haven't worked with a section 8 tenant and only identifying what info I have been given. I was researching personally of requirements in Michigan and they have a strict criteria. Would recommend you review those quickly while you figure out the feasibility for this property.
Also, wouldn't be afraid to not put the offer as you want to get your base template for valuing and whether you are going to make money on a property or not. A next one will come about and you will be able to quickly pull the trigger.
@Caleb Heimsoth Hi Caleb, thanks for letting me know, I have been thinking about investing out of state, but think as a beginner maybe that will be more difficult because the property is so far away, any places in PA specifically I should look at?
@Isaac El I don’t know anywhere specific in PA I just know people from NYC invest there because it’s cheaper and relatively close. I started out of state with my first one. Lots of people do. Just have to wrap your head around it at the beginning
Hello Isaac,
Here is how I would evaluate it.
$575-20% down= $460K financed. @6%= $2,760 per month
Total income $33,600 per year
- $8,400 (I figure -25% for management, vacancies & repairs)
- $33,120 annual payment
- $3,300 for taxes
- $ ?? water
- $ ?? Insurance
= $-7,920 already loosing money without water and insurance.
Do you have any good comps that would tell you the value? At first run of the numbers this does not appear like a good deal.
Hope this helps,
Ted
@Dennis M. - thank you Dennis, I appreciate that but around here the 2 families start around $550k and up
@Lori Greene Hi Lori I appreciate your feedback and would be very interested working with a good agent in Springfield Gardens.
@Ted Tackeberry Hi Ted I appreciate you breaking it out like that, and that is what I need to start learning how to do also to start evaluating deals. Once broken out like that it is not worth it at all. Can you break down or tell me how you got to the $8,400 figure?
@Isaac El there are tools on BP to do analysis that will calculate your return on investment. Personally before I get deep into analysis, the first thing I do is what @Caleb Godsey suggested. Divide monthly rents by purchase price. This is called the 1% rule, meaning if rents are above 1% of purchase price, then the deal is worth analyzing further. This rule is challenging in some markets like NY or CA. You just may never find a good property that satisfies the rule, partly because property values are appreciating more in certain markets. There is some level of speculation / appreciation built into the price. So it is possible the duplex is a good price, but not a good investment compared to other markets. That being said, I am a firm believer in buying local, especially for your first property. I would defer to someone who invests in the NY market. I would not make this investment in my market because I could get better return here.
Hi Isaac, if you dont have access to bigger pockets calculator try "dealcheck" as an alternative. It helps you calculate what your cashflow would be after expenses (mortgage, insurance, taxes, vacancy, repairs, capital expenses, property managment), it also shows you what the cap-rate would be and return on investment, if you put in how much you would spend on rehabilitation and how much you expect it will be worth after you make the repairs.
@Joe Splitrock Hi Joe, I really appreciate the advice, you are right hard to find properties here that fall into the 1% rule, but I also want to be local I am sure I will learn so much owning it.
@Tiffany Rosa thank you Tiffany, I will look for that tool on the website, and use it.
@Isaac El, it is great that you are looking at deals and getting started, but if the property isnt going to cash flow, it doesnt really make sense. As far as appreciation, that is tough to bet on, and we have to be at or near the top of the market anyway. The only way this deal might make sense is if you move into half of it and it decreases your current living expenses. Just my two cents. Good luck to you!
DJ
@DJ Cummins I appreciate it, I agree I don't think this makes sense either as an investment property, I am going to make them a low offer, if they are interested fine, if not move on to the next one.
Don't overvalue the need to be local. Yes you may learn some more, but you can learn a lot without having to lose so much money! Who cares if that's in your back yard or not if your back yard means you lose money.
The rents will maybe cover your mortgage payment and that's it... all property taxes, water, insurance, repairs/maintenance, property management, vacancy, capex, etc will all be out of pocket. If you end up running 50% for all that you're talking about losing $16,800 per year ($1400/month). That is one expensive education!!!!! I'd rather learn a little less and make money investing somewhere else.
And sure, you may say the appreciation could be tremendous, and perhaps it will be, perhaps we're at the top, but even if it is, you have to balance losing that much money a year until rents increase significantly, and you'll only make the money on the appreciation by selling or refinancing...
So your opportunity cost is probably even more tremendous than your gain. If you buy something that cash flows and make money for all those years, and use that cash to buy more properties, I'm pretty certain you would be way ahead vs waiting for the appreciation (although I can't officially say that since I haven't a full IRR, but I can say I didn't retire in 7 years by waiting for appreciation. And I have a pretty stellar net worth even though appreciation is a very small factor in my properties. Simple mental math would say I am way ahead on both income and net worth by investing in things that cash flow).
Hi Issac,
I love that you are looking for your first and appreciate it as I am also looking for my first and have been for about 1 year now on and off.
I want you to consider all of the expenses and income. Please do not under estimate these and do your Due diligence and homework before you ever buy. You do not want to end up in financial despair because you did not budget properly. Having said that...
Do you think you can get $1500 per unit once the problematic tenant is gone?
I think this is a possibility though I do not know your market but considering one of the tenants is already paying $1500, I would say the property can earn 3k per month, but for analysis reasons and always erring on the side of conservative I would use $2,800 per month as your income. Assuming there are not any other ways to make money from the property ie Coin operated laundry then this can be used to calculate your Cash on cash return and per unit cash flow. Before you can safetly calculate if this is a good investment, alot of questions should be answered.
How much money will you put down? This would effect the bank loan amount and therefore effect your cash flow per unit.
Are you owner occupying initially to house hack and then move out and rent it or buying as an investor? Either option may effect your down payment amount requirement and sqew your monthly numbers.
Flood insurance required?
On average, before you buy I would get a contractor, more than one, and several savy ones, to come look at the big ticket items on that property. And have them guess roughly the age of each and potentially if how much use each of them have left. Capital expenditures like roof, plumbing, electrical, foundation, outdoor stairs, lead paint etc. etc. Brandon Turner has an inclusive list in his book on rental property investing. Determining the age of each will help you determine the percentage of rent money you have to set aside per month to get these things repaired. Also, you can use the contractors advice as leverage when you are submitting an offer. You may be able to save say 10k off the cost because the roof life only has several years left.
How much is property insurance roughly?
Landscaping costs per month? Snow removal? Do you to want to do these chores for 30 year life of the loan? If you do, then no need to budget for these costs but ask yourself that question first. If you determine you dont want to do these then you have to budget this cost BEFORE YOU get involved in a purchase of a property. This can be said for property management as well. If you dont forsee you wanting to take care of the property for 30 years then you need to BUDGET BEFORE you purchase so you dont get into trouble later on say 15 years into paying the property down. You wont have enough money to pay the property manager 10% if you dont budget these costs before you purchase.
How much is the water bill on average quarterly?
What is the interest rate on your loan? For every 2 points of loan interest, is $500. So if interest rate is 3% as was many years ago and goes to 5% you as an investor lose $500 in potential cash flow every month.
What are closing costs as estimated by your local mortgage broker?
What is the vacancy rate in that area? The best way to find out vacancy rate is to talk with your local property management company to discuss how long it takes them to turn over a unit. Keep in mind that they may try to earn your business so the rate they quote you may not be exact so I would add an extra 1 or 2 % to the number they give you. Equally, the other best way I found to figure out vacancy rate is to call up rental ads from Craigslist in the area you are looking to buy and flat out ask the owner that you are looking to purchase in the area and wanted to ask them how long it takes for them to rent a unit when it comes available on average.
I'd be happy to help you calculate this property out to the T but there are a ton of variables you need to answer first, mentioned above. You can PM me if you like. I use the rental real estate calculator from financialmentor.com and the one BP has is great too but your limited on the amount of times you can use it if you dont have a pro accnt.
When you put all of these numbers into the cauldren, you can then calculate a yearly cash flow amount and cash on cash return.
I like most of my Cash on Cash return investments to be more than 12%. 7% is the historic stock market ROI. Because real estate isnt an instant liquidity investment, meaning you cant quickly sell off like you could a stock if things dont go well, I like to earn more on it. MY number is 12% or more, everyone is different. I also like to be at least $150-200 per unit in cash flow after all expenses. But that is harder to come by in my area (Northern NJ area.)
Again, all of these variables above will effect how much you take in at the end of the month. Which then will effect your cash flow, which can either make or BREAK your investment.
@Austin Fruechting Thank you Austin, this thread and the input from everybody has really opened my eyes, I have since done two things. On this property I have been able to explain (with facts) why its also not worth it to the owner and the broker, and now they are considering a significantly lower number, and the way I like at it, is if they take a lower number then fine and if not there are so many deals out there.
The second thing is, I have seriously been looking into out of state deals, and there is SOOO much opportunity out there, so I want to see what I am able to do, and like you said run some number where I am cash flowing, and making money!!! RIGHT OF THE BAT!