First Time Investor - Help Me - Is This a Good Deal?

Question

Hi All. I've only posted a few times as I've been trying to "simulate" deals as I find them - but haven't jumped on anything yet.

I originally considered condos but they are out of the question now due to HOA irregularities and unexpected circumstances. I'll leave it at that.

Can somebody analyze the work below for me and let me know if this is a potentially good deal?

4 Unit Building (one floor/ranch style) - located in Chicago suburbs. Asking price $389k. Built in 1962.

$3475 gross rent or $41700 annual rent

$8044 annual tax

Tenants pay electric

-- Let's also add in...

Insurance - not quite sure on this one - let's call it $500 a month? I have no idea honestly - nor do I know how to figure this out.

10% overhead for vacancy or - $347 per month

Replacement/maintenance reserve at 5% - $174 per month

Net profit per month: $2454 - is this accurate?

If I put 20% down on a conventional 30-year mortgage at 4.25% (the current going rate), the monthly mortgage cost is $2307.

This nets me a minimum of $147/month and maximum (with no need to use any reserves and no vacancies) of $668.

Am I doing the math correctly? Am I missing any factors? Am I "playing devils advocate" suffciently?

That's it for unit details that I have without approaching the seller.

Michael Facchini · Answer

Do you plan to live there?  If so, that's one less unit worth of rent....but then again, it provides a roof over your head and more cost-effective than rent or owning a 1unit (condo/SFR).  If you don't plan to live there, you'd need to put 25% down on investment/non-owner occupied.  We have options for as little as 15% down, but that gets you into portfolio financing at higher rates.  For conventional, you need 25% down...and the 30Yr Fixed rates on non-owner occupied investment are not at 4.25% (higher).

Insurance probably closer to $200/mo.

Overall, the numbers are a bit tight for my liking given 20-25% down.  Is it under-rented and rents should be bumped?  Any value-add opportunity?

Bob S. · Answer

Account Closed - Sure we learn from our failures but this isn't my way of going about it - considering it could be a $70k+ down payment... I'd rather do the math and evaluate the property to be "nearly" certain it'll cash flow.

Kyle Myers · Answer

It may not hurt to do a deal like this as a way to go through process and get failures out of way and learn more. The thing I would think about, at least I do is, if your happy with current job and do this as side income is $100 or $200 mo worth the work to manage yourself? It could end up being super easy deal never or rarely have to worry about tenants or maintenance making that net profit worth it. Could be a headache to deal with and that net not worth it, but I guess something really won’t know until your in it. not sure what you do for a living or salary so you’d have to determine if time spent on it makes sense.

Bob S. · Answer

Good questions to start with @Kyle Jey - this gets my wheels spinning.

I will self-manage and I live very close.

Landscaping, snow - these are not factored in besides the maintenance percentage (5%) I listed in my post.

I have no idea if the place needs rehab; all units are currently occupied and there are no images of the inside.

Closing costs - hadn't thought about this; would attempt to roll into the mortgage payments - maybe $100/month extra?

My overall goal is to "make some extra money per month" but I am very satisfied with income from my current job.

Kyle Myers · Answer

Math seems good. I’m usually more conservative on vacancies/op expenses. As long as managed yourself, no PM company. Are all expenses accounted for as far as landscaping/snow? Closing costs? upfront rehab costs needed at all?

I probably wouldn’t do deal based on cash return from how much up front it would take but it seems to make money so up to you on what your return goals are.