My First Deal, thoughts?

Question

My first deal. Stats are below. Tri plex in a B area Lakewood, OH area. Needs appx $8-$9k in work done to bring it up to par.

Thoughts/Peanut gallery comments/Whatever, let me know if this deal is plausible or I am missing something.  The #s seem good to me.

Jason Krick · Answer

@Tyler Huntington

I will assume your pro-forma on the expenses is accurate, and there are no common areas where you might need to pay for electric to a light or two; tenants pay for water, sewer, trash, etc.

My suggestion is to look hard at your acquisition costs.  First, when are property taxes due?  While it's accounted for in your on-going numbers, if taxes are due 10/1 and you settle 10/31, you will have to come out of pocket for 11 months of it immediately, which is about $4600.  Is the $8-9k in renovations confirmed by a contractor?  In my area, transfer taxes run 1%.  So, if this were in my county, that would only leave $1,500 for title search, title insurance, appraisals, inspections, loan fees, commissions, etc.  If the acquisition costs are higher, it will lower your COC.

Remember, you can make just about anything "Cashflow", if you put enough money down and reduce your payment, but you reach a point where the return doesn't make sense.  In quickly looking at this, I'd be careful that I wasn't sub-consciously massaging numbers on the front end in order to make sure I hit $100/door per month (Because I caught myself doing that numerous times when doing analysis).

Tim Puffer · Answer

@Liam Morris - Josh and Brandon aren't talking about taking 50% of the Cashflow - they are talking about taking 50% of the gross rent - say $2,000 multiplied by .5 gets you $1,000. You then subtract what the estimated debt service would be - say $800. This leaves $200 cashflow for three units - below $100 per door. The 50% rule is not a rule, but a means to weed out properties quickly. Just starting out I would learn to fully analyze a property before going with this guideline.

@Tyler Huntington - What is your investment criteria? Cap Rate, cashflow, cash-on-cash? Does this meet your parameters?

Liam Morris · Answer

I'm super new, so take this for what it's worth...

I could have misunderstood the 50% rule that Josh and Brandon talk about in one of their very early podcasts.  But what I thought they said is to figure out the cash flow and then divide it by two because history has tended to show that unexpected expenses (new water heater in yr 1, roof repair yr 2, etc) tend to eat up about half of your earned cash flow.  Then divide whatever is left by the number of units.  They like to see at least $100/unit minimum, and would prefer to see closer to $200/unit if possible when they do this quick litmus test of whether something is a good deal or not.

With your numbers above it would seem that taking the 50% of your $319 and then dividing it by the three units, you'd end up with about $53/unit/month in cash flow.  That doesn't mean this property won't work for you, but it's a quick metric to see if it has the likelihood of being a "good" investment, not just an "ok" one that  you scrape by with.

Tyler Huntington · Answer

Good question. Title report I have access to shows it's a duplex but everyone involved is telling me its a Tri. Definitely will sort that our prior. I am half way assuming it's a legal tri as there are three separate entrances, one for each unit and the third also has its own basement.

Matt Motil · Answer

gotcha. Forgot it was a triple. Is it a legal triple or a duplex setup as a three? I've had some appraisal issues getting loans done when they aren't legal.

Tyler Huntington · Answer

@Mike Motil, The lawn is just a sliver of green but good point. I'll factor in a bit more. Property is on the west side. $850-$900 a piece for two 3/1s and $550-$600 for a 2/1

Matt Motil · Answer

Lawn care is really low, you're gonna spend $35/week. What part of Lakewood is this? East side you're gonna have a really hard time getting those rents, period. Westside of Lakewood you can get those rents if your place is enormous and super nice, which I'm doubting a bit at a 150k purchase price.