Is an average deal okay to start?

Question

Hi, I'm in California and the property is located in Georgia. (My mom lives in Georgia so I have someone that help out if need be. I plan on using a property manager.

Here's the scenario. The deal I have is an average deal. Not a great one unless I bid 360k...but I doubt the buyer will accept it...

This is my first REI investment and it's out of state so I wanted a class A or B property which is why the deal is only average....

The property is a Quadplex. 2 units 2/1 and the other two are 3 1/1. Tenants are signed till 2008. Good area with growing population.

I'm assuming 10% vacancy rate, 6% property management. The cap rate I think is 6.5% and Cash on Cash is only 3%. New roof and gutter guard in 2006. Newly painted in 2006.

Purchase Price $400,000.00
Down payment $80,000.00
Mortgage at 6%.
$1918.00 Monthly debt payment
Gross Rental income
$37,020.00
10% vacancy ($3,702.00)
Tenants pay utilities
Tax $3600
Insurance $1500
I'm assuming 6% property management. I figure my cash flow would be $250 per month.

What do you think I should offer to make this a more attractive deal?
I mean I know he's asking for 400k but what would be a reasonable counter if at all? Cover all my closing costs? Paying more points?

Should I go ahead? Or wait?

Paralysis by analysis or just pass for now?

Please help.

Thanks

Account Closed · Answer

Why are you assuming property management will be 6%? Why not call PM's in the area, describe in general terms what you have--8 unit apartment building south side Atlanta, what do you charge, how do you charge, what all do you do for that? Send me a sheet with your info on it.

Call several and compare.

N/A N/A · Answer

Hi all,

After my mother and my step father checked out the location, it turns out the property is in fairly good condition...but it's the best property on an average block.

I want to thank everyone for responding. I can't tell you how much I value your input. I believe I could have made a huge financial blunder on this one.

It's just so frustrating to live in California...although I believe the market is getting softer. The California topic could be a forum by itself.

Michael Rossi · Answer

So, at a price of $360,000 and a 20% downpayment, you would be borrowing $288.000.  With a 30 year term and 6% interest, that would give you a mortgage of $1725.  With a NOI of $1,545, that leaves you a negative cash flow of $188 per month.  So, you would be putting down $72,000 for an "investment" that would lose $188 per month.

If you live in California and are going to buy property somewhere else in the United States, why would you buy a loser all the way across the country?  Surely, you could find bad deals right there in California.

N/A N/A · Answer

Hi everyone,

Just an update.... I checked the rent by talking with a couple property managers and the rent is in line with the market for that area. My realtor is comfortable making an offer of 360k net with seller concessions. He says he doesn't think we can close with this price.

He did mention one thing which I found odd...

The generally accepted protocol in Atlanta, unlike other parts of the country, is that an offer of less than 90% of asking price is not a "bona fide" offer. I moved here from Colorado 17 years ago and it took me a long time to get used to the concept...and in the mean time, I had buyers who lost properties they wanted to buy, because they started out too low and the seller and especially the seller's agent were offended and worked to assure that the "offensive" buyer did not "get" the property. A lot of it has to do with the listing agent thinking that the buyer's agent is telling his seller that he priced the property too high. It's very strange, but very true...a "Southern thang", I guess.

I have not seen the property. My mother and her husband will check the property out tomorrow.

(I'm taking everyone's advice and I'm learning against purchasing the property)

Michael Rossi · Answer

denny,

I have several dozen rentals and I can tell you for certain that I wouldn't touch this with a 10 foot pole.  It is a money pit!

If you do some research, you'll find that throughout the United States operating expenses run 45% to 50% of gross rents.  That 45% to 50% includes paid management, paid maintenance, and capital expenses.

So, let's take a look at the numbers on this "deal".

Gross monthly rents are $3,085 ($37,020/12).

To be on the conservative side, let's assume operating expenses at 50% of gross rents.  Therefore, operating expenses would be about $1,540 per month.

That leaves $1,545 per month with which to pay the mortgage and for any profit.  In this case, you said the monthly debt payment is $1,918 for a monthly negative cash flow of $368.  So, you would be putting down $80,000 of your own money for the privilege of losing $368 per month.

Personally, I would not do that.

Calvin N. · Answer

Many on here will advise not to go out of state for your first investment.  I live in Georgia and understand the incredibly high prices of California would make it difficult to find a deal there.  In your numbers you don't mention anything about other expenses such as maintenance, lawncare, utilities for outside lights, etc.  I don't see this as having any positive cash flow with the numbers you posted.

ON THE OTHER HAND:  Are the rents comparable to others in the area?  Can you do anything to increase the rents?  What is the motivation of the seller?  In my area apartments/duplexes go for around 45K - 55K each unit and rent for 350-500 for a 2/1 and 400-700 for a 3/1.  There is a lot of difference in pricing in Georgia from Atlanta to the coast to the small towns.  Have you seen the building or are you getting your information from a realtor?  Let us know more....

N/A N/A · Answer

I just did as you suggested and the one property manager I did like charged like 10% with a $200 fee for finding a tenant.

I'm still waiting for the rest to call back.

With 10% property management fee...would it be a good one to get my feet wet?