GOOD DEAL? Please TELL ME BEFORE I INVEST!

Buying & Selling Real Estate
10yFollow

GOOD DEAL? Please TELL ME BEFORE I INVEST!

Yousef RedaPro Member
Investor · Winnipeg, Manitoba · Member since 2016 · 92 posts · 40 votes

Okay location is in a small CITY!, however looking at the microeconomics and the city seems to be appreciating  slowly per year. The vacansy rate is around 2-5% over the last 3 years. Here is the numbers.

Rooms: 6 bedrooms 2 bathrooms

Tenants:

3 tenants

Unoccupied rooms: None

Rent for tenants:
2825$/month = 941$ each

Average yearly Income: 34, 200

Property Listed Price: @$299,000
Offered Price: $290,000

EXPENSES

Taxes: $1722 per year = 200

Insurance: 200
City water 150

Lawn 160$

Estimate for Vacancies: 5% 142.5
Its actually 5.2%
Repair: 7% 170

Property Management (10%) 285-> She told me she can have a friend watch and care for the property for me

Mortgage: 5% down(14,500) at 2.3% for

1206(adjusted)

Expenses total: 2228.52$/month

Cash flow= 596.48


NOI: 7157.76

ROI = NOIx12/14,500 = 49%

Okay guys so Looks like my Cash flow and ROI is GREAT. Please confirm I did numbers right. The other thing is this will be an out of state purchase. Thirdly she told me she has an older couple friend to care for my real estate who lives in the area and is reliable.

I dont want to miss out on a deal since everytime I find one someone steals it from me!! Shouldd i trust her friend to watch over property.

0Reply
32 views

Most Popular Reply

Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
10y

NOI does not include financing expense so you have some terminology wrong.

On the surface this looks good but there are things you haven't considered. 

  • Are you going to be able to get a 5% down loan for an investment property. Especially important in you are holding in an entity like an LLC.
  • Is this being used as a rooming house? Do the tenants pay separately? Is this zoned for that and is it legal use?
  • How about turnover costs
  • Lease up cost when there is a vacancy
  • licenses and permits
  • reserves for capital expenses.

Just some things to think about.

1Reply
See this reply in the discussion

12 Replies

Jump to latestLatest
  • Jalen Carethers
    Greensboro, NC · Member since 2015 · 125 posts · 74 votes
    10y
    Looks good to me. If I read everything correctly.
    0Reply
  • Dante Pirouz
    Investor · Almont, MI · Member since 2015 · 361 posts · 302 votes
    10y

    Is this an owner occupied property? How are you getting a 5% down loan if it is an investor property? Normally 20% down or more is required. And I actually estimate 10% for vacancies and 10% for repairs to allow for unexpected contingencies...you'd rather be generous on your expenses to ensure you are still cash flow positive than to underestimate them and be cash strapped.

    0Reply
  • Dante Pirouz
    Investor · Almont, MI · Member since 2015 · 361 posts · 302 votes
    10y

    And I would not trust someone to watch a property (it is a lot of responsibility and hassle) unless I was paying them something. 

    0Reply
  • Karen O.
    NYC, NY · Member since 2016 · 619 posts · 456 votes
    10y

    I'd be concerned  about the supposed property manager. Has this person been managing the property?  Or have they had experience with other property owners that might provide an independent reference?

    0Reply
  • Tom V.
    IA · Member since 2015 · 304 posts · 152 votes
    10y

    I would add another 5-7% into your expenses for capital expenditures in addition to regular repair costs to be safe.

    I'm not seeing an appraised value in your numbers. Are you sure the property is worth 290K? Forget the asking price, what is the assessed value of the property? Even though you are offering 10K less than the asking price, the ACTUAL value of the property might be even less than 290K. Check out the tax records for the property to ensure that the asking price is reasonable compared to the appraised value of the property. Good luck!

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    10y

    NOI does not include financing expense so you have some terminology wrong.

    On the surface this looks good but there are things you haven't considered. 

    • Are you going to be able to get a 5% down loan for an investment property. Especially important in you are holding in an entity like an LLC.
    • Is this being used as a rooming house? Do the tenants pay separately? Is this zoned for that and is it legal use?
    • How about turnover costs
    • Lease up cost when there is a vacancy
    • licenses and permits
    • reserves for capital expenses.

    Just some things to think about.

    1Reply
  • Account Closed
    Real Estate Investor · Rancho Santa Fe , CA · Member since 2016 · 323 posts · 107 votes
    10y
    Look into the numbers and the loan but it looks good to me
    0Reply
  • Yousef RedaPro Member
    OP
    Investor · Winnipeg, Manitoba · Member since 2016 · 92 posts · 40 votes
    10y

    @Dante Pirouz @Karen O.Thanks! Im backing out of yet another deal because it is a long distance investment and you and multiple other people are forecasting a lot of headache to come. You know in thinking about it more deeply, if someone gets a random person to do the property management with no pay it definetly would lead to subpar management of the property. 

    @Tom V.Thanks I will factor that in future investments. I did ask for an appraisal but she didnt have one. Tom its already hard finding deals without the capital expenditures, with that it would make it even more difficult. Point taken though thanks. 

    @Ned Carey Thanks for the input. Wouldnt it make more sense to include the financing expense aspect to NOI. You are correct though about this.

    Keep in mind im in Canada so our finances are somewhat different. Its a 4 plex that has 4 tenants already been living here for a few years. Yes it is zoned for that and legal. Vacancy rate I used was from actual numbers I pulled from the cities housing database. The rest of the questions you asked I didnt have a chance to ask them. However definetly good to know for the future. How do you estimate capital expenditures?

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    10y

    In the US (it may be done differently in Canada) financing expense is not considered when calculating NOI. There are multiple reasons for this.

    You are buying an operating business, to value the business, you need to know how much cash flow it is throwing off. How you are able to pay for it and what your return on investment is; is a different calculation. Obviously to calculate you cash on cash return you need to consider financing. But how you pay for it, should not and does not, change the value of the building (business)

    1Reply
  • Paul MacInnis
    Investor · Windsor, Nova Scotia · Member since 2015 · 128 posts · 34 votes
    10y

    @Yousef Reda - you need to ensure you allot some $ for capex.....it doesn't matter what it does to the cash flow!   When the roof needs fixing - it has to be done - best to sock money away for that inevitable day.  I also really agree with everyone regard of the management...if it's not done well - your investment could be a disaster....are you located in Winnipeg?  Where were you looking at investing?

    0Reply
  • Tom V.
    IA · Member since 2015 · 304 posts · 152 votes
    10y

    @Yousef Reda It is hard to find good deals in my area too, my local market is very tight. Many more buyers than sellers right now. There are lots of dumpy C and D class duplexes in crappy neighborhoods that are for sale, but hardly any A or B class properties which is what I want. I'm just doing my best to be patient. I would rather nave no deal at all than lose money on a bad deal.

    For estimating CapEx costs, some people just take a percentage of the gross rents, say 5%, to set aside for CapEx. But to me, CapEx costs really have nothing to do with the gross rents, and have everything to do with the useful life of the big ticket items like roof, HVAC, appliances, etc.

    The more sophisticated way to calculate CapEx is to amortize the costs of those big ticket items over time. So for example, if all 4 of the HVAC systems in this 4 plex are 10 years old, and the typical lifespan of a HVAC system is 20 years, then you can assume that you'll likely have to replace those HVAC systems over the next 10 years. If 1 HVAC costs $4K, times 4 would be $16K, amortized over 10 years, would equal $133.00/mo. Do the same analysis of the roof, appliances, driveway, etc, and add them all up and you've got your CapEx estimate.

    Of course, if you don't have any information about these big ticket items when making your offer, then you'll have to make a guess by using a percentage of the gross rents as mentioned above. If it is a well maintained property, maybe 5% would be a decent estimate, but if the property is very old and hasn't been well maintained, maybe a 7 or 8% CapEx estimate would be more appropriate.

    1Reply
  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    10y

    @Yousef Reda

    If this is a real quadriplex (4 distinct units, not just 4 separate rooms in a house), then the minimum downpayment possible is 10% and this would be a high-ratio, insured, mortgage for an owner occupied property (meaning you would need to reside in one of the units).  

    If you will not be residing in the property, then your minimum downpayment will be 20%. 

    If the house is a SFR, then you could conceivable purchase it as a secondary residence and achieve an insured mortgage (10% down payment). However, if the place is operating as a rooming house - legal or not - when the appraiser reports back that there are 6 bedrooms (each with their own locks) and separate leases for each of the tenants, the lender will run away.

    Additionally, what @Ned Carey indicated about debt service not being included in NOI holds the same as practiced by investors in Canada. Your accountant (in either country) will include the interest portion of your debt service as a business expense for tax purposes.

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free