How is this for first deal?

CA · Member since 2017 · 153 posts · 74 votes

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

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Account Closed

Johnson City, TN · Member since 2014 · 586 posts · 705 votes

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.

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Hau N.
OP
CA · Member since 2017 · 153 posts · 74 votes
9y
Originally posted by @Alice K.:
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!!
Duplicated post. Sorry.
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Jeff Petsche
Real Estate Broker · Yorba Linda, CA · Member since 2017 · 154 posts · 114 votes
9y
@Hau N.
I love when I get an opportunity to analyze a deal because there are some "basic foundational rules" almost everybody follows, but also many perspectives with regards to figuring out "basic expenses, CAP EX", etc.
Based on your rent/value ratio you are at .07, which is not uncommon in CA. Which is also why most CA properties today don't work at the current inflated market prices. It's rare to hit the 1% rule here or the HOLLY TRINITY rule of 2%..
One thing I'd want to know about this property is: Is this an value add property? Is there the possibility for forced appreciation through rehab? Are rents under performing for the area? Is there room for cutting expenses? Etc.
Also, they NEVER manage their own properties. Most new investors jump over dollars to save a penny by managing themselves, thinking they are cutting costs, but in the end they spend more of their valuable time managing tenants when they should be managing the asset and the management companies. What's your hourly time worth is the question I'd be asking because I don't want the 10pm phone call that the garbage disposal is not working.
With that said, based on the information you provided, and after running your information through our software analyzer, this doesn't even come CLOSE to hitting our numbers. Again, this is solely based on YOUR INFORMATION and without doing more due diligence.
Would there be loan points for this loan? I factored in 1% to be safe, which puts your total initial investment at $61,642.00, not the amount you mentioned.
We factor 10% vacancy (as did you) and an additional 30% of the Gross Scheduled Income for expenses (Taxes, Insurance, R&M, Property Management, etc.).
All said and done this comes out to a CAP Rate of 5%; COC of 1.8% and not that it matters for financial underwriting with a residential loan, but the DCR (Debt Coverage Ratio) is only 1.08. If this were looked at in the commercial world, lenders want a minimum of 1.2, we shoot for 1.65 to be safe.
All said and done, you are planning on managing yourself and cutting your own yard, which means you are working for your investment instead of your investment working for you AND you only have a $35/month cash flow to boot???
No thank you!!
Offer a LOI of $168,000 and see if you have a motivated seller. Otherwise, PASS!
1 Reply
Jon Q.
Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
9y
Originally posted by @Hau N.:

Originally posted by @Jon Q.:
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?
That question cannot be accurately answered by me. I am not you and I have a different investment criteria and return target than you do. It would depend on what risks you're willing to take, what your time is worth (if you're mowing lawns, make sure you factor the loss of hours/$ you could be spending at your day job), what risks you're willing to take and what return you'd like to generate in exchange for the risks you're taking.
My personal target returns are 12% Cash on Cash and 20% IRRS or higher and I'm fairly conservative as investors go, so I take very little risk with my money.
To go back to your question, in order to generate my target return with that property, my offer would be very low and it's doubtful that it'll be accepted...so I wouldn't waste my time with it. I only make offers on deals that are listed within 10% of what I know I can close them for (usually I negotiate the price further down after inspection, however it's unlikely you can negotiate down more than 10% unless the deal has significant problems).
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Jay DeCima
Redding, CA · Member since 2016 · 224 posts · 143 votes
9y
Forget it. No money in deal.
Crossing your fingers and hoping for appreciation is not a sign of a good real estate investor.
Use a small portion of you money to gain some investing knowledge. Google names of persons that invest like you do (or may want to do).
I have been investing in Northern CA for 40+ years. At my high mark, I had 250 rental houses (ALL with nice cash flow). I learned to buy groups of older houses (usually 5 or more) on a single parcel. Because a bank will not finance this kind of property, I almost always got seller financing...very mutually beneficial.
Good luck.
Fixer Jay
1 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Hau N.:

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.
If you "wait for another deal to come by" you will likely be waiting for a long, long time. Deals don't generally just fall from the heavens and land squarely into your lap. You usually have to pound the pavement to find them and/or better yet, create them ... and yes, this takes work, especially in the beginning before you have your systems, skills, knowledge, network, and techniques in place, but I know of no other reliable short cut to get them in place other than rolling up your sleeves and getting to work. Good luck to you!
0 Reply
Kraig Kujawa
Investor · Orlando · Member since 2016 · 151 posts · 72 votes
9y
Yeah listen to these guys.I didnt have the benefit of this site going into my first two deals. Almost 0 cash flow, now banking on increasing rents and appreciation.
0 Reply
Frank Artusa
Investor · Smithtown, NY · Member since 2014 · 11 posts · 1 vote
9y
Wouldn't the low cap rate be a clear red flag in this case?
0 Reply
Hau N.
OP
CA · Member since 2017 · 153 posts · 74 votes
9y
Originally posted by @Jeff Petsche:

@Hau N.
I love when I get an opportunity to analyze a deal because there are some "basic foundational rules" almost everybody follows, but also many perspectives with regards to figuring out "basic expenses, CAP EX", etc.
Based on your rent/value ratio you are at .07, which is not uncommon in CA. Which is also why most CA properties today don't work at the current inflated market prices. It's rare to hit the 1% rule here or the HOLLY TRINITY rule of 2%..
One thing I'd want to know about this property is: Is this an value add property? Is there the possibility for forced appreciation through rehab? Are rents under performing for the area? Is there room for cutting expenses? Etc.
Also, they NEVER manage their own properties. Most new investors jump over dollars to save a penny by managing themselves, thinking they are cutting costs, but in the end they spend more of their valuable time managing tenants when they should be managing the asset and the management companies. What's your hourly time worth is the question I'd be asking because I don't want the 10pm phone call that the garbage disposal is not working.
With that said, based on the information you provided, and after running your information through our software analyzer, this doesn't even come CLOSE to hitting our numbers. Again, this is solely based on YOUR INFORMATION and without doing more due diligence.
Would there be loan points for this loan? I factored in 1% to be safe, which puts your total initial investment at $61,642.00, not the amount you mentioned.
We factor 10% vacancy (as did you) and an additional 30% of the Gross Scheduled Income for expenses (Taxes, Insurance, R&M, Property Management, etc.).
All said and done this comes out to a CAP Rate of 5%; COC of 1.8% and not that it matters for financial underwriting with a residential loan, but the DCR (Debt Coverage Ratio) is only 1.08. If this were looked at in the commercial world, lenders want a minimum of 1.2, we shoot for 1.65 to be safe.
All said and done, you are planning on managing yourself and cutting your own yard, which means you are working for your investment instead of your investment working for you AND you only have a $35/month cash flow to boot???
No thank you!!
Offer a LOI of $168,000 and see if you have a motivated seller. Otherwise, PASS!
Thank you for the thorough analysis. I appreciate your time. I was on the border to make an offer, but with everyone inputs, I won't.
0 Reply
Hau N.
OP
CA · Member since 2017 · 153 posts · 74 votes
9y
Originally posted by @Jon Q.:

Originally posted by @Hau N.:
Originally posted by @Jon Q.:

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?
That question cannot be accurately answered by me. I am not you and I have a different investment criteria and return target than you do. It would depend on what risks you're willing to take, what your time is worth (if you're mowing lawns, make sure you factor the loss of hours/$ you could be spending at your day job), what risks you're willing to take and what return you'd like to generate in exchange for the risks you're taking.
My personal target returns are 12% Cash on Cash and 20% IRRS or higher and I'm fairly conservative as investors go, so I take very little risk with my money.
To go back to your question, in order to generate my target return with that property, my offer would be very low and it's doubtful that it'll be accepted...so I wouldn't waste my time with it. I only make offers on deals that are listed within 10% of what I know I can close them for (usually I negotiate the price further down after inspection, however it's unlikely you can negotiate down more than 10% unless the deal has significant problems).
May I ask where you invest?
0 Reply
Hau N.
OP
CA · Member since 2017 · 153 posts · 74 votes
9y
Originally posted by @David Faulkner:

Originally posted by @Hau N.:
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.
If you "wait for another deal to come by" you will likely be waiting for a long, long time. Deals don't generally just fall from the heavens and land squarely into your lap. You usually have to pound the pavement to find them and/or better yet, create them ... and yes, this takes work, especially in the beginning before you have your systems, skills, knowledge, network, and techniques in place, but I know of no other reliable short cut to get them in place other than rolling up your sleeves and getting to work. Good luck to you!
Good advice. I'll put more effort into this after my 9-5 full-time job and my 2nd part-time job.
0 Reply
Hau N.
OP
CA · Member since 2017 · 153 posts · 74 votes
9y
Originally posted by @Kraig Kujawa:

Yeah listen to these guys.I didnt have the benefit of this site going into my first two deals. Almost 0 cash flow, now banking on increasing rents and appreciation.
I'm glad I found this site before I invest. Thanks for dropping a line.
0 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Hau N.:

Originally posted by @David Faulkner:
Originally posted by @Hau N.:

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.
If you "wait for another deal to come by" you will likely be waiting for a long, long time. Deals don't generally just fall from the heavens and land squarely into your lap. You usually have to pound the pavement to find them and/or better yet, create them ... and yes, this takes work, especially in the beginning before you have your systems, skills, knowledge, network, and techniques in place, but I know of no other reliable short cut to get them in place other than rolling up your sleeves and getting to work. Good luck to you!
Good advice. I'll put more effort into this after my 9-5 full-time job and my 2nd part-time job.
Willing to self manage and mow the lawn, working 9-5 full-time and a 2nd part-time job ... you are a hard worker my friend, I'll give you that. Another poster's suggestion about funding a REIT that you can liquidate if/when you find a great deal may be a good option for you.
0 Reply
Lesley Resnick
Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
9y
I would consider a different deal. You will have to take money out of your pocket to keep the property running.
0 Reply
David D'Ambrosio
Investor · Brielle, NJ · Member since 2015 · 121 posts · 21 votes
9y
No it's not. Not at all
0 Reply
Moises B.
Investor · Bronxville, NY · Member since 2017 · 101 posts · 48 votes
9y
I'm sorry I don't own my first proper yet, but those specs seem slim to me. You may want to re-evaluate the price as it relates to you CoC returns %.
0 Reply
Sebastian MarroquinPro Member
Real Estate Agent · Pasadena, CA · Member since 2015 · 476 posts · 263 votes
9y
There are ways to cash flow in CA : you just have to be creative.
Value add.
conversions
new ordinances
etc
60k can make you at least 12k flat return per year: passively. (I'll probably make about 40k from a 60k investment: if I were putting in any money in the last deal I got into).
Learn: be creative and take action.
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Jimmy MoncriefPro Member
Chattanooga, TN · Member since 2010 · 319 posts · 100 votes
9y
Sorry man - that's way too close in my opinion :-/
Podcast Guest on Show #55
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Hau N.
OP
CA · Member since 2017 · 153 posts · 74 votes
9y
Thank you for all the responses. I've learned a lot from your recommendations. I'm crunching new numbers on difference properties and found a few better than this one with cap rate >8%. However, it is in a class C neighborhood that I'll check out this week.
0 Reply
Account Closed
Investor · Orlando, FL · Member since 2015 · 23 posts · 6 votes
9y
My best...
0 Reply
Matthew A.
New Haven, CT · Member since 2016 · 90 posts · 99 votes
9y
Heck.. even 30 yr treasury bonds would be better. $60,000 @ 2.85% makes you $142.50 tax free a month on average and would be the definition of passive. Not that that I would choose a treasury bond over a low risk mutual fund that could easily net 6-8% a year.
Just showing you, that in a click of a few buttons you could have that bond purchased and never look at it ever again.
Or you can manage a property, deal with all the headaches it comes with it for potentially +-$35 in monthly cashflow.
Doesn't seem worth it.
GL!
0 Reply
Hau N.
OP
CA · Member since 2017 · 153 posts · 74 votes
9y
Originally posted by @Matthew A.:

Heck.. even 30 yr treasury bonds would be better. $60,000 @ 2.85% makes you $142.50 tax free a month on average and would be the definition of passive. Not that that I would choose a treasury bond over a low risk mutual fund that could easily net 6-8% a year.
Just showing you, that in a click of a few buttons you could have that bond purchased and never look at it ever again.
Or you can manage a property, deal with all the headaches it comes with it for potentially +-$35 in monthly cashflow.
Doesn't seem worth it.
GL!
I agree that this is a bad deal. My Fidelity accounts are up 10-11% this year so far. I can put more into stocks but I'm looking into REI now.
0 Reply
Matthew A.
New Haven, CT · Member since 2016 · 90 posts · 99 votes
9y
@Hau N.
I would at least try to make your real estate numbers comparable to the average gains in the market of about 7-8% annually. That way, if/when you property appreciates hopefully, the mortgage is being paid down AND you are cash flowing, you'll be better off.
Now.. you can make your deal work for you, by changing your maintenance/capex/vacancy percentages.. 10% vacancy is rather high, and accounting for 36-37 days a year of it not being rented.
The great thing about numbers, is you can make yourself believe it's a good deal, or be too conservative and make yourself believe it's a bad deal.
-Matt
1 Reply
David D.
San Diego, CA · Member since 2017 · 19 posts · 8 votes
9y
@Joe Scaparra You can make money in CA without the market going up. If this 260k house is 260k in 15 years, you still made money because somebody paid off 75% of the house for you, if you got a 15 year mortgage. I am not saying the OP deal is good, or that cash flow doesn't matter, but the fact that someone else is paying off the house for you is definitely a way of making money.
0 Reply
Joe Scaparra
Investor · Austin, TX · Member since 2013 · 662 posts · 1k+ votes
9y
@David D you might be right but you might be wrong. Here is why. In my example on the duplex in Texas, I am paying down the loan with EXCESS cash flow from my tenants. Theoretically, my tenants are paying off the home. In CA, the income from rents are not enough to pay the expenses to include the mortgage so you are going to be negative each month probably for a good portion if not all of the 15years. So how much of the mortgage is paid by the tenants over the 15 years is debatable.
Now the good news, CA real estate in most years has gone up in value and as long as you catch those years you might do alright. Unless you live in the home you probably are going to look for an exit strategy as that is how the money is made in CA. Just hope you don't catch a downturn. But the premiss remains and for most CA real estate investors the housing markets must go up to make money.
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