Deal Worth it?

Question

I could use some advice on whether this is a good real estate investment.

I’m buying a duplex in Columbus, Ohio (ZIP code 43205). Each unit has 3 bedrooms plus a finished attic that could potentially be used as a fourth bedroom. The two units have the same layout.

Here are the details:

●            Purchase price gives me approximately $20,000 in equity based on the property’s current market value (“as is”).

●            I qualified for 100% financing, so my only upfront cost is about $12,500 in closing costs.

●            My monthly mortgage payment will be approximately $2,980.

●            The property is expected to receive a 15-year tax abatement, which will significantly reduce property taxes during that period.

●            One unit is fully renovated but currently vacant. I believe it should rent for about $1,800/month.

●            The other unit is not fully renovated and is currently rented for $1,400/month. After renovating it, I believe it could also rent for around $1,800/month.

My expectation is that the property will appreciate at an average of about 2.5% per year over the long term.

Based on these numbers, does this seem like a good investment? Are there any major risks or red flags that stand out? Would you move forward with this purchase, or would you pass on it?

Thanks!

Austin MacKay Childs · Answer

It would be useful to know purchase price. Based on current rates and your stated mortgage payment, it seems that you might be paying around $475K, which would put your closing costs around 2.6%. A little high but reasonable.

Also note the following input assumptions:
- Market interest rate: 6.47%
- PMI: 0.5%
- Taxes (specific to that zip): 1.472%
- Insurance (quoted by Steadily): 0.386%
- Property management: 10%
- Vacancy: 5%
- CapEx: 5%
- Both rent and home value appreciation: 2.5%
- Exit fees: 6%
- Renovation costs: $10,000
- Rent: $3,600 (post renovations)

The IRR looks ok because your upfront costs are incredibly low, but your monthly cashflow is almost certainly going to be negative. In my opinion, there are much better deals out there, even in the same zip. Some investors are ok with shelling out cash every month to bank on appreciation, but they are much braver than me. Personally, I would rather have my investments cashflow positive with margin for error, and then appreciation is a nice bonus.

Andrew Teichner · Answer

I would shy away from 100% financing. It is hard to judge the overall returns without knowing the purchase price, but assuming negative cash flow from the vacant space and potentially renting it at $1,800, you are barely covering your mortgage payment. Assuming it is leased for the full year, you are only profiting $2,640. Any large capital cost will wipe that away and some.

I would look for new deals.

JV Kaufman · Answer

I'd need to see the numbers. Make sure you are counting all your upfront cash requirements, holding costs, and a reserve for replacement or Cap5%. You've got to get thorough inspection(s) of eveything even if you have to pay for them.  Those might save you plenty of pain in the future. Inspections done not by a real estate inspector but by equipment providers or subs that work on systems (plumbing, electrical, etc.,,) in the area. Improvements made already may not be what you think they are. Make sure your renovation cost cover your projected improvements.  I mean a legitimate contract by a reputable contractor. Ask around.  And make sure your DSCR works for banks as well as investors. Two different scenarios. DSCR's will help to get you a sale if the deal turns sour. Don't ever buy an investment without having an exit plan. Questions welcome.

Bruce Woodruff · Answer

What @Andrew Teichner said. ^^^^ As I said before, this is way too tight. You're not allowing for Mr Murphy....

Nicholas L. · Answer

@Sarah Mill

how did you qualify for 100% financing if it's going to be an investment property?

Robert Ellis · Answer

The thing that changed my thinking was when I stopped asking, "How much cash do I need to buy it?" and started asking, "How much cash will I need to keep it?"

I bought a property years ago with very little money down and convinced myself I was getting a great deal because my upfront investment was so low.

Then the water heater failed.

Then a tenant moved out.

Then insurance increased.

The property wasn't a disaster, but I realized I had almost no margin for error because I'd spent all my attention on getting into the deal instead of surviving the first couple years of ownership.

What would make me nervous here isn't the $12,500 to close.

It's that a $2,980 payment against a projected $3,600 rent doesn't leave much room if the second unit takes longer to renovate, sits vacant, or rents for less than expected.

If both units rented for exactly $1,800 tomorrow, what do you estimate your monthly cash flow would be after repairs, vacancy, maintenance, insurance, and capital expenses?

Ken M. · Answer

• Year of      build
• principal
• taxes
• insurance
• HOA if      applicable
• heat
• water
• garbage
• vacancies
• amortized      roof replacement
• amortized      heater replacement
• amortized      paint replacement
• amortized      carpet replacement
• amortized      remodel replacement
• amortized      plumbing\water\sewer repairs
• amortized      electrical repairs
• amortized      insulation repairs
• amortized      window repairs/replacements
• step &      porch repair/replacement
• snow removal
• garden      & lawn upkeep
• tax write      offs
• appreciation
• depreciation      recapture
• cost of      sales when selling
• any other      obvious items that will need to be repaired/replaced in 15 years

Remington Lyman · Answer

It depends on what your goals are. If you are just getting started in real estate investing then I think this is a solid deal to get your feet wet

Bruce Woodruff · Answer

My comments would be -

1) How did you figure the immediate equity of $20k? If you're going to pump money into remodeling one unit, that will wipe that out....

2) With a mortgage payment of $2980, and expected rent of $3600, that leaves you a little tight, right? After adding in Insurance, Taxes, CapEx and incidentals, you could be upside down right away....unless I'm missing something...

3) What is the ARV currently?

4) Don't ever put too much value on your 'expectations'.

Unless you can get the spread a little more generous, I would rethink this one.....Just my $.02

Mike Paolucci · Answer

43205 is a good zip code to be in but it also depends on which pocket it's located. I used to live in that zip code and enjoyed my time there.

Knowing the purchase price and address will also help out a lot. Happy to answer any questions you might have.

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