My first deal - Should I do it?

Question

Hi everyone,

I'm a newbie... found deal in North / Central New Jersey. Used the rental calculator. Questions: Did I use the right calculator? Should I buy the property.

Here's the details.

2 Family - 3 stories built 2009.  Unit #1 - 5 bedroom & 3 baths. Unit #2 - 3 bedrooms & baths

Purchase Price: $229,000.00

Purchase Closing Costs: $2,500

Estimated Repair Costs: $2,000

Total Cost of Project: $229,000.00

After Repair Value --> $239,000.00

30 years 4.000% $819.96

Down Payment Assumption -->$57,250.00  Loan Amount $171,750.00 $0.00 (4% over 30 years)

Monthly Income: $3,500.00 (from 2 Units)

MonthlyExpenses: $2,481.04

Monthly Cash Flow:  $1,018.96

Purchase Cap Rate:  9.64%

Vacancy 5%, CapEx 10%, Water & Sewer $100, Insurance$100, Property Taxes mo $581.08, lawn care$50

Can you give advise on Buy or Don't Buy?

Thank you!

David Weintraub · Answer

You don't come back to Jersey if you don't have to.

Actually, better put, you don't leave California if you don't have to (west coast) .

Geoffrey Schaeffer · Answer

for rental comps,

Checks Craigslist, zillow, apartments.com or possible call PM companies in the area and ask what the going rent is for a unit like yours.

What repair cost is 2k that adds 10k in value?

Also 50 bucks for lawn care? In coal country Ohio its ussually 50 bucks per cut, in early spring the grass gets cut once a week.

At first glance these numbers seemed to good, but perhaps I am missing out, after all I got out and tried to pump my own gas once in Jersey.

Owen Dashner · Answer

I am not familiar with the location, but I do not see how there is any way that a property built in 2009 (basically almost new) has that type of unit configuration and number of bedrooms.  That has to be a huge duplex.  My guess is that it is an older house converted into a duplex and was constructed over 100 years ago.  I could be wrong on this, of course.  The first thing I would do is to verify the age of the property.  Houses in the early 1900's might have old mechanical systems, asbestos, lead paint, old wiring, etc.

I would also second the comments from @Will Barnard about the $2K repair costs.  You would not be able to even paint half of the duplex for that amount.  Even if it only requires paint, fllooring and appliances for both sides, that would still probably amount to $20K or more in costs.Is the property currently occupied, or vacant?  That will also be telling in your rental rate projections and repair costs.  Even houses in pristine condition typically need some repairs/updating.

Just my $.02.

Chris Torres · Answer

@Mety K estimated repair cost is 2k? Please double check this if you haven't physically been to the property than that estimation might not be correct just double check to be sure seems way too low.

Will Barnard · Answer

Property managers in the area should be able to give you rental comps.

The numbers look good except they don't add up on costs and vacancy factor of 5% is pretty low. If you average properties of this caliber over many and many years, I think you will find your vacancy will be higher. I would be using 8% minimum. Just because last 3 years was 5% does not mean it will stay that way forever.

$3500 in gross rents on a $230k purchase is pretty good though so I wonder if hat is accurate.

Steve Babiak · Answer

I don't see how the numbers posted add up to the total that is being shown.

Mety K. · Answer

Saw property, its in Newark NJ. Quiet street. I've estimated the repair to be $20K -- just to modernize the property. Otherwise, in great shape, as it is a true 2006.  Checked rentals in the area -- about $1500 per month.  Should I go for it?? Obviously Id' love to offer less than $229K.

Mety K. · Answer

Thanks ! Will be checking the place today. I'm sure the repair cost is much closer to your estimate. It is a newer property, I've verified the county website -- but not in the best part of town.

Will Barnard · Answer

This is a great point and likely the missing factor in your numbers (or one of them). Even if the rental rate could get the $3500, then I bet you would need $30K+ to put into it before getting such rates.

Mety K. · Answer

Thanks @Will Barnard and @Geoffrey Schaeffer.

I am going to do all that you suggested to get a better rental estimate.

Everyone seems skeptical about the numbers - and I am glad. I will redo the analysis. Honestly, I have not seen the property yet (schedule to do so today / tomorrow) and will get a better idea about repair cost, lawn care etc.  Geoffrey, come back to Jersey, we still won't charge for pumping your gas.

My first deal - Should I do it?

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