How is this for first deal?

Buying & Selling Real Estate Discussion 51 Replies

Hello everyone,

I'm thinking of purchasing my first property ever (other than my primary residence), but not sure if it's a good deal.  This is a 1984 duplex, 5/4, located in a class B neighborhood within walking distance to shopping plazas.  I was hoping to obtain some inputs on this deal to make sure I'm not missing anything.  There is a similar unit that is currently pending.  The asking price for that was $255,000.  Thank you in advance.

Purchase/Finance

Asking price: $259,000

Down 20% = $51,800

Interest 4.5%

30-year loan term

Closing cost of 3% = $7,770

Total cash needed = $59,570

Operation

Gross rent / month = $1,900

Operating income = $1,620

Operating expenses = $625 (36.8% of income: 10% vacancy, 10% maintenance, 10% cap ex, property management %10, insurance $50, property taxes $243, gardening $50)

NOI = $1,024

Loan payment  = $1,050

Cash Flow = $35/month

Cap Rate = 5%

ROI (year 1) = -7.1%

ROI (year 2) = 12.9%

ROI (year 5) = 79.8%

-HN

That's cutting it really close. If it were me, I'd take that money and use it for something with better cash flow.

$35/month? Not enough. Need to get it much cheaper.

@Connor Heim, I'm with you, but again we are spoiled here in Texas.  I'm closing on a duplex in Bryan TX in August and I would classify it as an average deal.  130k duplex with $1325 rents that I think I can get to $1600 in two years or less.  Last Sept bought a $200k four plex with $2875 in rents.  Gig'em.

Am I reading correctly that you are willing to invest 60k in order to cash flow $420 a year? Please tell me that I am readin this incorrectly. A bank CD has a better return with FDIC insurance. Maybe the 420 explains it.

@Hau Nguyen - $50 per month for gardening? That seems high, and I usually include something like that in my monthly maintenance percentage. What's your reasoning for setting aside $50 per month just for gardening?

Is your monthly income based on the comparable rent rates in the area? Is there any ability to appreciate the property and pull some money out through a refinance?

Great job on splitting up your expenses - it looks like you did your research ;)

I'm going to agree with @Joe Scaparra in that the cap rate and ROI is really up to the market area.

I'm also going to agree with @Connor Heim in that I would try to get the property cheaper. I personally wouldn't go for a rental with that low of a monthly cash flow, but I also don't live in your area and don't know what the comparisons are in your area.

If you don't need $50 for gardening, that'll certainly bring your income up a little bit - but again, I don't know your reasoning and you might be spot-on for your cash flow evaluation.

Ok - I have to edit after Tim's comment came in right before mine. The 420 might explain $50 per month gardening haha!

Originally posted by @Connor Heim :

That's cutting it really close. If it were me, I'd take that money and use it for something with better cash flow.

 It is very close.  If I manage on my own and do the gardening myself then it'll be a bit more.  Thank you for your response.

Originally posted by @Scott Weaner :

$35/month? Not enough. Need to get it much cheaper.

 I agree.  I probably will offer much less than the asking price.  With the asking price, there won't be any meat on the bone fore me. 

Originally posted by @Joe Scaparra :

@Connor Heim, I'm with you, but again we are spoiled here in Texas.  I'm closing on a duplex in Bryan TX in August and I would classify it as an average deal.  130k duplex with $1325 rents that I think I can get to $1600 in two years or less.  Last Sept bought a $200k four plex with $2875 in rents.  Gig'em.

 Wow.  Sound like there are great opportunities to invest in Texas.  Cash flow properties in California is difficult to find.  The ones with decent cash flows are located in neighborhoods that I don't want to deal with.  Thank you for the response.

Originally posted by @Tim Chapman :

Am I reading correctly that you are willing to invest 60k in order to cash flow $420 a year? Please tell me that I am readin this incorrectly. A bank CD has a better return with FDIC insurance. Maybe the 420 explains it.

 You're probably right.  I need to push the purchase price lower and manage it myself if I want to increase cash flow.  

Originally posted by @Hau Nguyen :

Hello everyone,

I'm thinking of purchasing my first property ever (other than my primary residence), but not sure if it's a good deal.  This is a 1984 duplex, 5/4, located in a class B neighborhood within walking distance to shopping plazas.  I was hoping to obtain some inputs on this deal to make sure I'm not missing anything.  There is a similar unit that is currently pending.  The asking price for that was $255,000.  Thank you in advance.

Purchase/Finance

Asking price: $259,000

Down 20% = $51,800

Interest 4.5%

30-year loan term

Closing cost of 3% = $7,770

Total cash needed = $59,570

Operation

Gross rent / month = $1,900

Operating income = $1,620

Operating expenses = $625 (36.8% of income: 10% vacancy, 10% maintenance, 10% cap ex, property management %10, insurance $50, property taxes $243, gardening $50)

NOI = $1,024

Loan payment  = $1,050

Cash Flow = $35/month

Cap Rate = 5%

ROI (year 1) = -7.1%

ROI (year 2) = 12.9%

ROI (year 5) = 79.8%

-HN

That's a 0.7% cash on cash return.  No way would I invest $60k in that deal to generate a measly $420 a year.  It's also built in 1985, and I'm not sure how much of a rehab budget included in your estimate, because I don't see one?  What are the current rental rates of comps on the area? Of the properties with the highest rental rates, what improvements must you add to the subject property to achieve those renrs?  At a minimum, is include a budget for floor replacement and interior paint because, more often than not, it'll need it...that's $3-5k right there.... dropping your cash on cash return to 0.6%. At that return, you'll likely do much better with a index fund investment and take a lot less risk.

Originally posted by @Ben Wilkins :

@Hau Nguyen - $50 per month for gardening? That seems high, and I usually include something like that in my monthly maintenance percentage. What's your reasoning for setting aside $50 per month just for gardening?

Is your monthly income based on the comparable rent rates in the area? Is there any ability to appreciate the property and pull some money out through a refinance?

Great job on splitting up your expenses - it looks like you did your research ;)

I'm going to agree with @Joe Scaparra in that the cap rate and ROI is really up to the market area.

I'm also going to agree with @Connor Heim in that I would try to get the property cheaper. I personally wouldn't go for a rental with that low of a monthly cash flow, but I also don't live in your area and don't know what the comparisons are in your area.

If you don't need $50 for gardening, that'll certainly bring your income up a little bit - but again, I don't know your reasoning and you might be spot-on for your cash flow evaluation.

Ok - I have to edit after Tim's comment came in right before mine. The 420 might explain $50 per month gardening haha!

@Ben Wilkins Thank you.  I wanted to be conservative and set aside $ for gardening.  If the norm was to include in the maintenance, then that's another $50 to include in cash flow. :)  The month rent is based on current tenant monthly rents.  Thank you for your thoughtful response.  

Originally posted by @Ben Wilkins :

@Hau Nguyen - $50 per month for gardening? That seems high, and I usually include something like that in my monthly maintenance percentage. What's your reasoning for setting aside $50 per month just for gardening?

Is your monthly income based on the comparable rent rates in the area? Is there any ability to appreciate the property and pull some money out through a refinance?

Great job on splitting up your expenses - it looks like you did your research ;)

I'm going to agree with @Joe Scaparra in that the cap rate and ROI is really up to the market area.

I'm also going to agree with @Connor Heim in that I would try to get the property cheaper. I personally wouldn't go for a rental with that low of a monthly cash flow, but I also don't live in your area and don't know what the comparisons are in your area.

If you don't need $50 for gardening, that'll certainly bring your income up a little bit - but again, I don't know your reasoning and you might be spot-on for your cash flow evaluation.

Ok - I have to edit after Tim's comment came in right before mine. The 420 might explain $50 per month gardening haha!

Simply draft your leases forcing the tenants to pay for landscaping.  In most markets, $35-$50 is the typical cost of landscaping.  But even if that boosts cash flow...there's not enough yield here to address the risk associated with this type of investment.  I don't care what market, cash flow of $35-$80 a month isn't sufficient.  It's even worse if I know I'm buying near a market peak (as is now the case) and not at a market bottom so that appreciation is more likely.

Originally posted by @Jon S. :
Originally posted by @Hau Nguyen:

That's a 0.7% cash on cash return.  No way would I invest $60k in that deal to generate a measly $420 a year.  It's also built in 1985, and I'm not sure how much of a rehab budget included in your estimate, because I don't see one?  What are the current rental rates of comps on the area? Of the properties with the highest rental rates, what improvements must you add to the subject property to achieve those renrs?  At a minimum, is include a budget for floor replacement and interior paint because, more often than not, it'll need it...that's $3-5k right there.... dropping your cash on cash return to 0.6%. At that return, you'll likely do much better with a index fund investment and take a lot less risk.

 I set aside 10% for cap ex, 10% for maintenance.  You're right about the rehab part that I didn't include in my calculation.  Thank you for that!  It seems like this is a not a good deal for me.  Thank you for all the responses.  

At what purchase price would it make this deal a bit more enticing?  

 Probably need to manage everything or leaving lawn mower on site for self service.  For Fresno the roi of 5% looks low. If it was me I would get 6-8% return from REIT mutual funds that you can unload instantly until you find a dream property.

Originally posted by @Sam Shueh :

 Probably need to manage everything or leaving lawn mower on site for self service.  For Fresno the roi of 5% looks low. If it was me I would get 6-8% return from REIT mutual funds that you can unload instantly until you find a dream property.

You're right.  I won't bite on this deal unless I can push the purchase price lower.  I'll be patient and wait for another deal to come by.

@Hau Nguyen - Help me understand the numbers - you say Gross Rent's are $1,900/mo then you state your operating income is $1,620/mo - where's the $280 decrease stem from? 

Originally I thought perhaps you were calculating an estimated 10% vacancy but that would be $190 which would bring operating income to $1,710 -

Secondly, you state your NOI is $1,024 - Niether $1,620 (your stated operating income) less $665 (your stated expenses) NOR $1,920 (your stated gross rent) less $665 (your stated expenses) equate to an NOI of $1,024???? When I do the math you provided, you have a NOI of $627 if you're basing the expenses off the $1,620 figure, or $797 if you're basing the expenses off the $1,900 figure - The 10% you list for Vacancy, Cap ex, maintenance, and property management alone equate to over $625/mo. in expenses regardless of which figure you use.

Also, you state the debt service is $1,050 - that means you would actually be NEGATIVE $26/mo after debt service according to my calculations, and that would be using your NOI of $1,024 and frankly, I'm not sure where that comes from???

Where are you coming up with your $35?

@Connor Heim , @Scott Weaner , @Joe Scaparra , @Tim Chapman , @Ben Wilkins - am I missing something???

Medium adley group logo white backgroundAdam Sheren, Adley Group | [email protected] | 2317947658 | http://www.adleygroup.com

@Adam Sheren I screw up on my calculations.  Thank you for the feedback.  Operating income should be $1710 (not $1620).  The decrease from $1900 to $1710 accounts for vacancy of 10%.  (Originally I used rental income of $1800 so the decrease lead to $1620.)  Although, I plan to buy and hold for decades and hope for return of investment in appreciation, this is not a good deal from all the feedback I am receiving.  Thank you again!  I'm impressed with your meticulousness.

I would not spend $60K to make $35 /mo but that's just my opinion

Be very cautious as a real estate speculator. There is going to be adjustments and values will at some point drop. Those speculators operating without cash flow are going to lose on both ends.

While continuing to look if you can not find a property with rents equilivant to a minimum 1% of purchase price you should not even consider the purchase. If your market can not produce these types of deals you should not consider investing there.

Investors that accept poor investment numbers because "that's the way it is here" will regret their decisions.

@Adam Sheren  you are correct.  Once the deal was flagging red, it wasn't worth my time to crunch to the last dollar.  Again I'm spoiled here in Texas, it is hard to get excited on deals that  at least don't make the 1%.  You can find nice turn key properties with 1% in Texas and the last time I check a dollar made in Texas spends like a dollar made in CA, well not really, in CA I still got to pay state income tax too.

From what I hear its not all roses and sunshine in Texas either... high property taxes, shifting foundations.  Every market has its strengths and weaknesses.  People in cash flow markets look down there noses at appreciation markets.  And people in appreciation markets end up not investing because they listen to the advise of people that do not have experience in that kind of investing.  Not trying to dog on people I just believe that some of the responses on this thread are from people with strong opinions about markets they have never invested in. 

@Hau Nguyen

You should find a local successful investor to bounce idea's and possible deals off of.  

Just eyeballing it -- I do deals in a similar market. 

You can probably do better. 

Unless you think you can really boost that rent and the market would pay-- I would hold off. (If you are comparing to California, it probably sounds really sexy; I know how tempting this appears!!) You can find one a bit cheaper I believe. 

You _could_ cash flow if you do it right but the work and rehab on particulars of a 1980's property can eat up the cash flow.

Here are some other questions to consider (maybe you already factored in with these w/ the 10% cap ex / other deductions)

* Roof state? (10 - 20k expense)

* New appliances? (That hit me hard when I closed)

* How's the water situation there? (Will you be paying? This eats into cash flow if you will)

* How's the rehabbed apt competition? (Can be heavy competition if you try to raise rates later on)

Good luck!! 

@Chris Gibbs , I gotcha, every market has their own issues no doubt.  California investors generally are forced to be capital appreciation focus and here in Texas generally cash flow focused.  However, the overall risk level is lower for a cash flow investor and even in Texas we are getting good appreciation. 

Don't take offense to our points of view, they are what they are, I happen to base mine on experience.  You make good points on Texas issues (property tax) but given all that in consideration if I'm positive after all said and done then in my opinion it is better than negative cash flow.  High property tax is offset by no income tax and overall less price per property compared to CA.  A 200k property in TX might be a 400k property in CA and in the end, taxes might be the same for the same type property.  

Lastly, for some one to make money in CA on property the market MUST move UP.  Not the case for a TEXAS cash flow investor.  I can buy a duplex in Texas for 150k own it for 10 years, sell it for 100k and still make 70k.  You can't do that  in CA as far as I know.

Originally posted by @Chris Gibbs :

From what I hear its not all roses and sunshine in Texas either... high property taxes, shifting foundations.  Every market has its strengths and weaknesses.  People in cash flow markets look down there noses at appreciation markets.  And people in appreciation markets end up not investing because they listen to the advise of people that do not have experience in that kind of investing.  Not trying to dog on people I just believe that some of the responses on this thread are from people with strong opinions about markets they have never invested in. 

@Hau Nguyen

You should find a local successful investor to bounce idea's and possible deals off of.  

Good point. I am looking for a REI group to attend locally. Thanks for the response.