What if I don't "buy it right"?

Buying & Selling Real Estate
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What if I don't "buy it right"?

Altwon Simmons
Buffalo, NY 路 Member since 2017 路 13 posts 路 1 vote
Hello brothers and sisters of BiggerPockets馃憢馃従. I have a situation I'd like some help with. I sent my very 1st letters out and my mothers neighbor (a duplex owner) is welling to sell. The problem is that his asking price is market value馃様. I ran all the numbers with the BiggerPockets calculator and it still cash flow a few hundred dollars a month and it makes me feel like it's a great deal but if I'm not "buying it right" I'm I setting myself up for a terrible situation?? Here some information on the deal. Grade of the area.... C- Asking price... 75k Square feet....2000 (each unit is 2bed 1bath) City..... Buffalo NY Rent-o-meter........ $1500 ($750 per unit) Home condition.... C (will need a roof within 5-7 yrs) Does these numbers say RUN or should I be trying to close this deal asap? HELP ME BP FAMILY!馃檹馃従
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Account Closed
Flipper 路 Pittsburgh, PA 路 Member since 2017 路 218 posts 路 345 votes
9y

@Altwon Simmons

First of all, you don't need to hurry. You need to calculate and then make a decision to pull the trigger or not. Put aside the automated deal calculator and let's do this the old-fashioned way. You've got to walk before you can run.

1. It's a rental property. Figure a value through the capitalization rate. Let's begin with assuming that a 12.5% cap rate will work for you in a Class C- neighborhood. It does for most folks.

2. A Class C property always has a number of deferred maintenance issues (like that roof) waiting for you. So we're not going to worry about that in our initial calculation.

3. Figure out the Gross Operating Income per year. In this case, it's $18000 a year.

4. Now you need to subtract some numbers from that $18000. The main ones are property taxes. What is the property assessed at by Erie County? I did a bit of looking and this is the millage for the rest of your taxes: Non-Homestead property + school district taxes, 27.009026 mili rate. Sewer rent millage: 1.6535119. Erie county millage: 6.456522. Using the given county valuation for the duplex, figure the tax rate and subtract the taxes.

5. Are you going to have this property managed by a third party? Subtract $1800, 10% of gross rental returns.

6. How much in yearly maintenance are you going to need here? Replacing that roof on a structure that size is going to cost you $12,000 if you get a nice quote on it in Buffalo. I would subtract at least $2500 per year. Be on the safe side and subtract another $1500 for other maintenance issues. So $4000 per year.

7. Both tenants have been there for over 3 years. Subtract $1500 for vacancy, 2 months per year, which is optimistic but not particularly unrealistic in this case, I think. Worry about how you're going to upgrade it and put in college students and deal with their problems later.

8.  How are you getting the money? Cash? Loan? What is the financing cost per year? Subtract that value.

9. Now you are at your net operating income (NOI). The asking price is 75,000. 12.5 cap rate is your target. So divide $75,000 by 8. $9375 is 12.5% of $75,000.

10. Is your NOI equal to or greater than $9375? If yes, buy. If no, do not buy.

It's a rental property. It generates income. You are buying an asset that generates income. It could be compared to any other asset: shares in a company, a hotel, a dog-walking business. Would you be happy buying stock that generated a 12.5% return on your investment every year? Would you be happy buying a dog-walking business and having the dog walker give you 12.5% of the money you sank into the business back every year? Probably. That's why you calculate the cap rate like this.

Is the property going to go up in value? Is it going to go down in value? That does not directly depend on the neighborhood and what single-family homes in the neighborhood are doing. It only directly depends on how much rent you can get from tenants living in those two apartments.

Hope I've helped.

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  • Thomas S.
    Member since 2016 路 13k+ posts 路 12k+ votes
    9y

    The deal can work assuming you realise that a C class is a hands on investment, lots of work to manage tenants and proper screening is essential.

    You must also know what all the costs are in maintaining the property and what the market rents are for the area. Deferred expenses etc. Also are the present tenants worth keeping, are they section 8.

    Secondly you must understand that the ask price is of very little importance to you. The only number that matters is the price you are willing to pay. If he is asking 75LK and you want to know if $75 K is reasonable for you to pay the answer is no. Buying investment properties is always a negotiation process.

    "should I be trying to close this deal asap?"

    Never approach any investment as a ASAP situation. It isn't going anywhere and there are thousands of others still out there.

    2Reply
  • Jeff Filali
    Rental Property Investor 路 Broken Arrow, OK 路 Member since 2016 路 1k+ posts 路 1k+ votes
    9y

    IMO Real estate success is made when BUYING, not on cash flow or selling. Its either a deal or its not. NEVER EVER EVER PAY RETAIL!! May be different if it was fully occupied, in a very competitive area, recently updated property and needed zero repairs. Figure out what your MAO is on the property, make the offer, if they won't budge...RUN!! on to the next deal!!

    1Reply
  • Christopher Phillips
    Real Estate Agent 路 Garden City, NY 路 Member since 2016 路 3k+ posts 路 1k+ votes
    9y
    Altwon Simmons We would need the rest of the assumptions that gets you to the cash flow
    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire 路 Northeast, TN 路 Member since 2015 路 10k+ posts 路 16k+ votes
    9y

    That's not much information to go on, but on the surface you've got a 2% property ($1500/75000) which is kind of the 'holy grail' around here. Do you pay utilities? What other capital expenses have been deferred? Tax burden? ETC. 

    You really have to know what the property is worth rather before you know what the seller wants for it. 

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    1Reply
  • Altwon Simmons
    OP
    Buffalo, NY 路 Member since 2017 路 13 posts 路 1 vote
    9y
    Thanks a lot, the tenants have both been there over 3yrs. I was thinking I could put college students in it because it's about a quarter mile from UB but I'm not to sure of the dos and donts with college student housing. I guess I feel I need to hurry because I know one of the tenants wants to buy it as well so naturally I feel the need to make decisions faster but I appreciate the help A LOT!!!
    0Reply
  • Derrick E.
    Investor 路 The Creek, WV 路 Member since 2014 路 890 posts 路 1k+ votes
    9y

    As someone else said, you are an investor. Low ball then, if they don't budge, then go find someone who will. There are amazing deals out there if you are patient enough.

    1Reply
  • Mike CumbieBusiness Member
    REALTOR庐 路 Brockport, NY 路 Member since 2015 路 3k+ posts 路 4k+ votes
    9y

    @Altwon Simmons

    Since it's a duplex have a CMA ran to see what it's market value is (It will be ran as a single family house). That should give you an idea of what you are looking at. Then back out from there with your numbers. If it comes back at 120K that tells you one thing, if it comes back at 35K that tells you something totally different.

    Good Luck!

    1Reply
  • Altwon Simmons
    OP
    Buffalo, NY 路 Member since 2017 路 13 posts 路 1 vote
    9y
    Thanks for the input everyone. I'm not sure how to tag you guys to reply to you all but just know your information is greatly appreciated!
    0Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire 路 Northeast, TN 路 Member since 2015 路 10k+ posts 路 16k+ votes
    9y
    Originally posted by @Altwon Simmons:

    Thanks for the input everyone. I'm not sure how to tag you guys to reply to you all but just know your information is greatly appreciated!

     Type @Mike Cumbie  or @Altwon Simmons (yours won't be blue). That will turn it blue, of the people in the thread. 

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    Skyline Properties
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  • Andrew Johnson
    Real Estate Investor 路 Encinitas, CA 路 Member since 2016 路 3k+ posts 路 3k+ votes
    9y
    Altwon Simmons So, in my opinion, you have two issues: 1.) You're vetting one deal against itself. You aren't in 10 dialogues and most people naturally end up with a scarcity mentality. Instead of thinking: "There's no pressure, this is a retail-price deal, I can get them all day long on MLS." Since you're asking on the forums you're either not seeing equivalent deals on MLS (which might mean retail value is off) or there's some scarcity thoughts running through your head. 2.) Pairing with #1 it sounds like you didn't have predetermined thresholds that would analytically tell you how to qualify a "good deal". Is your threshold 80% of your belief of "market value"? Is it $200 per month in cash-flow? Is it a 15% cash-on-cash return? I don't think there's a one-size-fits-all metric but it's certainly good to define it. Or maybe it's something else and I'm completely wrong!
    2Reply
  • Bob Razler
    Rental Property Investor 路 Boca Raton, FL 路 Member since 2017 路 329 posts 路 237 votes
    9y

    One of the home builders I used to work for had the following on the wall:

    "You can buy more land in an afternoon than you can sell in a lifetime."

    The point being you win when you buy it right.  Buying it wrong can kill more than the deal.

    2Reply
  • Altwon Simmons
    OP
    Buffalo, NY 路 Member since 2017 路 13 posts 路 1 vote
    9y
    @andrewjohnson I always see in books, podcast and post online saying 20% is a golden rule when investing so it feels weird to take a deal that's not giving me that. I personally like the cash flow more because I would like to get to the "financial independence" but your right, it's a 1000 things running through my head, I just want to make the best decision for me and my family.
    1Reply
  • Rod HanksBusiness Member
    Insurance Agent 路 Dallas, TX 路 Member since 2013 路 743 posts 路 462 votes
    9y
    Never be a motivated buyer in this game. Motivated buyers become motivated sellers real quick. Let the numbers make the decision for you. Always Always buy deals with equity AND cash flow! Make an offer that gives you both.
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  • Matt K.
    Walnut Creek, CA 路 Member since 2015 路 3k+ posts 路 2k+ votes
    9y
    Originally posted by @Altwon Simmons:

    Thanks a lot, the tenants have both been there over 3yrs. I was thinking I could put college students in it because it's about a quarter mile from UB but I'm not to sure of the dos and donts with college student housing.

    I guess I feel I need to hurry because I know one of the tenants wants to buy it as well so naturally I feel the need to make decisions faster but I appreciate the help A LOT!!!

     How do you think that tenant is going to feel when you "stole" this property from them before they "had a chance" to buy it and live in it... Sounds like a headache to me, let the tenant "buy it" and if the deal falls through low ball them... if not find another deal, nothing seems objectively special about this one rather it's emotionally driven.

    1Reply
  • Altwon Simmons
    OP
    Buffalo, NY 路 Member since 2017 路 13 posts 路 1 vote
    9y
    I'm not going to lie... It has some emotional to it. It's bad to have feelings in this game I see lol. I'm learning as I go. The hunt for a deal must continue
    0Reply
  • Matt K.
    Walnut Creek, CA 路 Member since 2015 路 3k+ posts 路 2k+ votes
    9y

    They have their place but they shouldn't be used to "make" a deal work. The deal should work because the numbers/data tell you they do, the emotions should give you the push to make the leap of faith to trust your research.

    1Reply
  • Harrison Liu
    Investor 路 Seattle, WA 路 Member since 2016 路 143 posts 路 68 votes
    9y
    @Altwon Simmons go with your instinct, don't get hang up on buying retail. especially if you are buying for long term. After 20 years even if you over paid a little is insignificant. I bought all my rentals off MLS and I didn't regret one bit I paid retail for it. As a matter of fact, I just helped a new investor bought a duplex off MLS in the super hot Seattle market. as long as numbers make sense why cares about the source of the deal! on paper you are getting a 2% deal. My question is, is it really in a C- neighborhood or a D neighborhood? You are the only one knows the answer since it is your local market. looking at your profile, you already have one rental under your belt, you should have the experience and knowledge to know if it's a good deal or not, so like I said go with your instinct. Don't be afraid to make mistakes, you will learn more from it than your success stories.
    1Reply
  • Harrison Liu
    Investor 路 Seattle, WA 路 Member since 2016 路 143 posts 路 68 votes
    9y
    one more thing to add. in a super competitive market like west coast market the only way to find a good deal might be off market. but in a linear market like buffalo, you should be able to find good deals off MLS. it is simply because of supply and demand. when there are more inventories, it's easier to find and negotiate a good deal.
    1Reply
  • Account Closed
    Flipper 路 Pittsburgh, PA 路 Member since 2017 路 218 posts 路 345 votes
    9y

    @Altwon Simmons

    First of all, you don't need to hurry. You need to calculate and then make a decision to pull the trigger or not. Put aside the automated deal calculator and let's do this the old-fashioned way. You've got to walk before you can run.

    1. It's a rental property. Figure a value through the capitalization rate. Let's begin with assuming that a 12.5% cap rate will work for you in a Class C- neighborhood. It does for most folks.

    2. A Class C property always has a number of deferred maintenance issues (like that roof) waiting for you. So we're not going to worry about that in our initial calculation.

    3. Figure out the Gross Operating Income per year. In this case, it's $18000 a year.

    4. Now you need to subtract some numbers from that $18000. The main ones are property taxes. What is the property assessed at by Erie County? I did a bit of looking and this is the millage for the rest of your taxes: Non-Homestead property + school district taxes, 27.009026 mili rate. Sewer rent millage: 1.6535119. Erie county millage: 6.456522. Using the given county valuation for the duplex, figure the tax rate and subtract the taxes.

    5. Are you going to have this property managed by a third party? Subtract $1800, 10% of gross rental returns.

    6. How much in yearly maintenance are you going to need here? Replacing that roof on a structure that size is going to cost you $12,000 if you get a nice quote on it in Buffalo. I would subtract at least $2500 per year. Be on the safe side and subtract another $1500 for other maintenance issues. So $4000 per year.

    7. Both tenants have been there for over 3 years. Subtract $1500 for vacancy, 2 months per year, which is optimistic but not particularly unrealistic in this case, I think. Worry about how you're going to upgrade it and put in college students and deal with their problems later.

    8.  How are you getting the money? Cash? Loan? What is the financing cost per year? Subtract that value.

    9. Now you are at your net operating income (NOI). The asking price is 75,000. 12.5 cap rate is your target. So divide $75,000 by 8. $9375 is 12.5% of $75,000.

    10. Is your NOI equal to or greater than $9375? If yes, buy. If no, do not buy.

    It's a rental property. It generates income. You are buying an asset that generates income. It could be compared to any other asset: shares in a company, a hotel, a dog-walking business. Would you be happy buying stock that generated a 12.5% return on your investment every year? Would you be happy buying a dog-walking business and having the dog walker give you 12.5% of the money you sank into the business back every year? Probably. That's why you calculate the cap rate like this.

    Is the property going to go up in value? Is it going to go down in value? That does not directly depend on the neighborhood and what single-family homes in the neighborhood are doing. It only directly depends on how much rent you can get from tenants living in those two apartments.

    Hope I've helped.

    3Reply
  • Altwon Simmons
    OP
    Buffalo, NY 路 Member since 2017 路 13 posts 路 1 vote
    9y
    James K. Yes! You most definitely did help. I'll plug all the numbers and see if I'm satisfied with the outcome. Thanks you!!
    0Reply
  • Michael Lester
    Flipper 路 Buffalo, NY 路 Member since 2017 路 33 posts 路 7 votes
    9y
    Market's peeking. Properties on the west side are sitting on the market now where last summer they were selling right away. So I would advise not to pay retail. Look for below market value deals. If your a cash buyer you can find great deals because your not competing with people making poor decisions with the banks money. Go after property that isn't mortgageable. Less demand brings down price.
    1Reply
  • Altwon Simmons
    OP
    Buffalo, NY 路 Member since 2017 路 13 posts 路 1 vote
    9y
    Thanks a lot and yes, those west side homes are sitting longer and longer. In my opinion I'd buy on the west side vs any other area because north buffalo you can't cash flow at those prices, east side is 99% a war zone and South buffalo seems to be slowly declining. I'm new to this so I could have it all wrong though. Time will tell.
    0Reply
  • Derrick H.
    Real Estate Investor 路 Buffalo, NY 路 Member since 2009 路 151 posts 路 49 votes
    9y

    Why is EVERYONE starting in the Highest demand or Overpriced areas of the City? It would be like buying a Ferrari as your first car. Yes, it does LOOK good but it's difficult to maintain and can be overpriced. Start in the low impact Grey areas. Learn the system of owning a Hold or Rehab. Get to know the building inspectors and judges. Know the areas that produce the best return on investment. Also, You're not going to earn a lot of money just owning 1 rental. As someone who use to OWN 50, you're going to be spinning your wheels.  

    0Reply
  • Altwon Simmons
    OP
    Buffalo, NY 路 Member since 2017 路 13 posts 路 1 vote
    9y
    Derrick H. I'm not sure why others are starting in higher areas but my reason is to maximize my money. If I buy a 4 unit on the east side with 25k down I'm pretty sure it'll cash flow well but the home value would take a longer time to grow. Vs 25k down for a 4 unit in a gentrifying area (lower west side) where I could capture cash flow as well as some solid appreciation. Is that the wrong mindset when investing in buffalo? I've talked to investors that love the east side and pay cash for homes and just cash flow... and others that leverage more aggressively and stay away from that side of town but still make a killing. Seems to be a preference based thing, any advice from a proven investor is worth listening to in my eyes. I'm all ears. Thanks.
    0Reply
  • Derrick H.
    Real Estate Investor 路 Buffalo, NY 路 Member since 2009 路 151 posts 路 49 votes
    9y

    In my opinion, it's the wrong mindset. On average I recv'd 20 - 30 leads per week. The majority are based in the Grey areas of the City. The High end/High demand areas are 1 - 5%. My conversion is high based on the amnt of return you'll receive for those Grey areas. Basically, all I'm saying is this..... "While you're waiting for the whale, I rather catch the little fish and be eating plenty. "

    1Reply
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