Trying to do my first investment - can you help me evaluate deal?

29 Replies

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! 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.

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@Shola Kadiri

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.

@Amit Bagaria

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.

@Isaac El f you’re near NYC I’d consider looking over the state in PA or maybe upstate NY. This won’t cash flow I’m guessing at all. Most people in this situation go out of state but this can be done a couple separate ways. How far you go is up to you.

As far as your original question this isn’t a deal.

@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 

It would need to be half that in price for the numbers to work . Bad idea bro . That’s not a deal

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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?

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Thank you Lori

@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

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