How does this deal look?
I am considering my first 4 unit and would appreciate the help of the BP community with analyzing the deal.
Some background: I am interested in buying this property to hold and start generating a rental portfolio. The building is out of state(PA), about 2 hours from my home. It has been fully rehabbed from top to bottom. All necessary CO's are in place. The property is situated in a neighborhood of SFR's which makes it kind of difficult when running the comps and finding a true value. I have to go further outside the area to find similar 4 units to compare but then the neighborhood changes so I guess those are not really comparable. The rental market appears strong from my due diligence and according to the REA that I am working with, very strong. 3 of the 4 units are already rented and the seller agrees to let me fill the fourth unit prior to closing. I am not sure if buying an occupied building is too risky as I did not have the benefit of screening the tenants? Leases are signed for a year each. The owner purchased the property for $45K and is now selling for $290K. I was going to offer $250K. I am not quite sure how he purchased for so low as all the other homes in the area are significantly higher. I also do not know how much rehab was required to get it to its present condition.
The numbers: I based everything off a purchase price of $270K to be conservative, although I am not sure how much higher than $250k I would be willing to go. I am trying to implement the 50% rule with 1/2 of the gross rent going to costs of holding the property, including 1. Rent loss (vacancy,concessions,non payment) 2. Capital Costs 3. Expenses (property tax, insurance, maintenance, property mgmt., turnover costs, cpa/attorney fees, utilities, landscaping) Thanks to J Scott for posting the video on the 50% rule which I am using here. The other half going to debt service.
$270,000 purchase price
RENTS:
unit 1 =$750
unit 2= $675
unit 3 = $625
unit 4= $900
Gross $2,950 month/$35,400 year
Expenses:
Taxes………………….. $379.16
Insurance ……………... $100.00
Property MgMT @ 12% $350.00
Vacancy @ 5%…………..$150.00
Water/Sewer…………….$100.00
TOTALS…………..monthly $1,079.16/$12,950 year
I plan on using conventional lending with 25% down ($67,500) mortgage of $202,500 and closing cost around 5K. I spoke to my mortgage broker who feels I could get 4.5% interest with a monthly payment of aprox $1040.00.
$2950(gross rent)-$1475(expenses)-$1,040(debt service)=$435 Cash flow.
How do these numbers seem? Am I over looking something or under estimating any of the expenses? Thanks in advance for reading and any opinions or suggestions.