I could use some feed back on a potential deal.
-Side by Side Duplex located in good neighborhood
-3 Bed / 1 Bath
-Asking Price 118K
-Both units rented ($750 and $775)
-All other utilities separated and paid by Tenant
-Other Factors 5% Vacancy, 5% Repair & Maintenance, 5% CapEx and 10% Property Management
Upon drive by the property seems to be in good shape.
The financing behind this would be a commercial loan (20 yr @4.45%).
As it sits it is a 8% CoC with $183 monthly cash flow which really does not excite me.
My thoughts are with minor tweaks (slight rent increases $25 per unit, and a 110K purchase price) the numbers start to work. This would bring 12.5% CoC and $264 per month cash flow. In our area I don't think its a GREAT deal until we hit 18%+ CoC and get cash flow in the $350+ range however given the neighborhood I think I am willing to accept the 12.5% and $264.
Another thing I have thought about is that because we are purchasing this under and LLC we need commercial financing. The bank we work with is great and have the best deals around that I have found. The down side is they don't offer 30yr commercial. Simply switching the financing from 20yr to 30yr makes a huge difference. So what may be a great deal for someone that can do 30 yr turns out to be only so-so for me. Should I put any weight in this?
I would say make sure the market supports your slight rent increases. Do you have justification that tenants are a little below rent? Perhaps doing some small cosmetic things would help before bumping it up a little bit (fixing some small broken things or a fresh coat of paint). This will make sure the relationship starts off on the right foot.
To your point on 20-year mortgage vs 30-year mortgage and it's affect on your CoC return. I don't really like how most of BP does not factor in mortgage paydown in their returns. I get it that you don't realize this return until you sell or refinance, but it's still part of your return. It's sort of like a stock investor only counting dividends in their expected return and not appreciation (although were not even factoring in appreciation - just paydown of principal!). So although your CoC return looks lower, if you factored this in, the difference b/w 20 and 30 year mortgage would look very similar.
Also no harm in trying to negotiate unless you think the deal will go for asking and you really want it.
@Charles Kennedy yes I am certain that the market in the area can support the rent increase. I agree the pay down plays a role in the deal but I guess the argument is that your tying up cash that you could use to buy a better deal. As you said that money is locked in until you sell or refinance the property.
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