Should I Buy This?

[Lolo Druff]

I have 2 days left on my contingency and need to make a decision! I'm in contract on a 4 unit property in Ohio. B- neighborhood I'm told. Rents are all $700. Market rents are $975. $492K purchase price and $11,300 in property taxes (zoned for good schools I guess) but ouch...

I would be putting 25% down, and would like to get rents up to market but with insurance, maintenance, etc I would probably loose $12k my first year. I hope once I get rents up I could get closer to break even but the cap rate is like 3% ? 

I've become familiar with Ohio and want to focus my investing here, but it's becoming harder to cash flow. Is this a deal I buy for appreciation and correct the rents to market and hope they keep going up while rates keep going down? I feel like the only deals that cash flow are C class areas with little appreciation but in theory flip side $11,300 in property taxes cuts into a lot of your appreciation ....

please someone help me! I am looking at all my investments as long term buy and hold 

[Dan H.]

Quote from @Lolo Druff:

I have 2 days left on my contingency and need to make a decision! I'm in contract on a 4 unit property in Ohio. B- neighborhood I'm told. Rents are all $700. Market rents are $975. $492K purchase price and $11,300 in property taxes (zoned for good schools I guess) but ouch...

I would be putting 25% down, and would like to get rents up to market but with insurance, maintenance, etc I would probably loose $12k my first year. I hope once I get rents up I could get closer to break even but the cap rate is like 3% ? 

I've become familiar with Ohio and want to focus my investing here, but it's becoming harder to cash flow. Is this a deal I buy for appreciation and correct the rents to market and hope they keep going up while rates keep going down? I feel like the only deals that cash flow are C class areas with little appreciation but in theory flip side $11,300 in property taxes cuts into a lot of your appreciation ....

please someone help me! I am looking at all my investments as long term buy and hold 

 Run from this deal.

> Rents are all $700. Market rents are $975.

As others have already indicated, attempting raising rent to market has risks. If it wad real easy to raise the rents, ask why the current owners have not raised the rent? Here are some thoughts: 1) if tenants have been in the units for a while the units are not in the same condition as those getting market rent. They need a tenant flip to be worth market rent. 2) raising rents significantly increases risk of tenant vacating. Vacancy results in no rent and the costs of a tenant flip. It also requires effort to obtain a replacement quality tenant. 3) no matter how thorough you screen the new tenant, there is a risk.

> $492K purchase price and $11,300 in property taxes (zoned for good schools I guess) but ouch...

This property tax rate means this property will never be a good rental. That is a property tax rate of 2.3%. That is crazy high. See the section on projected cash flow.

> would like to get rents up to market but with insurance, maintenance, etc I would probably loose $12k my first year. I hope once I get rents up I could get closer to break even but the cap rate is like 3%

This is wishful thinking. You will be losing ~50% more than projected?

With the current rent your monthly rent ratio is 0.57%. This property would be large negative at 1% ratio due to the extreme property tax rate and the low rents.

If you did manage to get the rents to $975 without a large cost, your monthly ratio is 0.79% and still very negative.

Now let’s look at the property tax impact. At current rents, the property tax consumes over 4 months of rent. If you were to get the hoped for rent increase, the property tax consumes nearly 3 months of rent.

I always use conservative numbers in my underwriting as such I will underwrite at $700 rent. The vacancy/sustained expenses will exceed the 50% rule due to high property tax rate and the low rent point. I suspect on this property vacancy/expenses will be ~60%.

The math
$2800 * 0.4 (60% allocated to vacancy/sustained expenses) - $2,663 (P&i) = negative $1,543/month = $18,516/year

Are you prepared to supplement this property over $18k/year? Note this negative cash flow would consume the first 3.76% of appreciation.

Note sp500 has lifetime return of near 10%. It is passive. Residential RE is not passive and has many risks. I do not invest in RE to make less or just a little more than I can make passively via the sp500. I question why anyone would choose RE for anything less than a projected 20%/year. I expect much higher return than 20%/year from my RE investments.

> rates keep going down

I do conservative underwriting. I never underwrite for a rate reduction. In this case, I am not expecting a significant rate reduction soon (contrary to Trump’s wishes). The reality is inflation is significantly higher than the 2% target. The fed knows this.


This is not a good investment or even an ok investment.

Good luck