2nd Deal making me nervous

21 Replies

Hello my friends!
Im in the middle of signing a contract with a deal and its really making me nervous. Ive run the numbers and its a good cashflowing property. Well I should say its a great ROI property @ 26.7% to be exact! It makes me extremely nervous because its only at $66 a door. With it being a duplex it will only net $133 cashflow. Im trying to pull the trigger but im getting a weird gut feeling I cant exactly shake off.

The first year before I change the taxable amount for my county it nets the 26% ROI with only $6000 down of my own money bringing in a total of $133 cashflow. The second year I predict it to be 32% ROI, still only $6000 of my own personal money and $163 total cashflow.  I can raise rents slightly higher giving the cashflow i want, but I dont want to rely on a prediction that can possibly fall through, I like to be slightly pessimistic in the beginning of deals. I ideally want $100 per door.

I see great ROI but not a lot of cashflow to justify it.
I want to hear all of your opinions, especially for this being my second rental property, is it a wise decision?

@Tyler Witkowski - deals these days are getting tighter. If you were really conservative on your numbers and made sure to build in capex, and you have a healthly reserve already started, having a low per door cash flow might not be too bad if you can get 26% per year.

Keep in mind there are multiple wealth generators, it is the cash flow, appreciation, tax deductions (which might change some with the new tax law) and the principal paydown that can boost the ROI. So while you might be only getting $133 per month, you are getting a lot of other benefits.

What is the condition of the property? If it is old, and hasn't been updated in a long time, a couple big repairs can eat up all that cash flow for years. 

Also, take a moment to reflect on what is giving you the funny feeling in your gut? Is it purely from the low per door number? Or do you think you would have this feeling no matter what because it is only your second deal? Could it be that this deal is going to push you financially and take most of your capital which then causes you to be focus more on the low per door number? I personally found a little self reflection can help figure out what my gut is saying and that gives me more clarity on whether to move forward or not.

@Tyler Witkowski Personally, this deal wouldn't be good from my lens. When you talk about $66/door you could have one expense, one unexpected (low-dollar) plumbing repair, and you've lost your entire year of cash-flow. Now if this property was built in 2016 and is awesome, that's one thing, but it was built in 1963 that's another. But the net challenge is that you can't pay for unexpected repairs with ROI percentages, you need to use real dollars. This property won't give you a ton in "real dollars" to play with. Now is $66/door always bad? Not really. If you had 20 units at $66/door you at least have some substantial cash-flow to handle those issues and everything doesn't break at once. It's a little less likely that you'll have to come out of pocket. For a duplex there's a decent chance that any hiccup in the first few years will have you coming out-of-pocket to pay the expense. If you know that, great. If the ol' W2 (or other investment yields) can't support that, not so great.

If you're only putting $6000 of your own money into this, is it around a $30,000 purchase price?  Of are you going to owner occupy? Something else?

I personally wouldn’t do something at 66 per door assuming two doors. Have you accounted for things like sewer/water etc? A lot f times in a duplex the owner pays for this

You can make data tell any story you want.... and it looks like you're using it (%) to make it sell yourself this "deal". I'm with the others, this seems like a hard pass, not enough cash flow to make it through anything that will come up. Leave this to a paper exercise and go find something where the money works rather than percentages.

Thank you everyone for replying to this, all of you have good info to reflect on.
To answer everyone at once, I have put in water/ sewer, Garbage, Electric, Vacancy @5%, Maitenance @5%, Capex @10% and management @10%. Im managing this myself.

Ive included all of my expenses so I believe. The building was built in the 60s and in great shape. There is about $20k In repairs, I'm factoring it at $25k with a purchase price of $55k. I see other buildings in the area going for $75k and back in 2007 this property sold for $120k, but thats not todays market. The down payment is $11k, I have others putting in $5k and myself $6k to get this deal. So with the $20K in repairs, that would be fixing all major problems with building, Including 2 new furnaces, 2 Hot water heaters, 2 bathroom remodels, and new flooring in 1 unit. I see it as this would bring down the maintenance and capex costs, leaving me with the cashflow that I need next year when I can tweek the numbers to real maintenance costs. Since i'm unexperienced i'm putting in larger numbers to save, for those "oh ****" moments. its a foreclosure and that last owner remodeled 1 unit completely and looks very nice. 

This will not be owner occupied.

Are there current tenants already in place or will you have to find new ones? If you have a bit of a cash reserve and have conservative numbers (it seems like you do for the most part), I would go for it. When you finish repairs can you raise rents? There may be hiccups but if you have some funds set aside it should be okay. It's up to you and what you're comfortable with. If you buy but don't like the numbers in the future, would you be able to sell for more than you paid as another exit strategy?

Run. I would never want to take $400 a door on a duplex. You can do better. That leaves you no room for error or change in taxes or any other problems you may have. Run.

Originally posted by @Marcus Johnson :

Run. I would never want to take $400 a door on a duplex. You can do better. That leaves you no room for error or change in taxes or any other problems you may have. Run.

 Can you elaborate? Im not understanding what you mean.

Sorry I was using the voice feature on my iPhone and it miss typed. What a mean is $66 per door isn’t a good deal imo. Leaves you no wiggle room should taxes go up like-mind did or something unexpected happens when you have a huge expense and you noe you don’t have cash for for years upon years. I didn’t not want anything less than $250 per door in duplexes.

I could raise rents after I fix everything up but even then its speculation in my eyes. Im going off what the market is telling me and the make is $700-$750 in this area. im basing my data of the medium of $650 bringing in the $1300 a month. If I rented for the $700 per door I would then be at my goal of $100 per door, but I see this as speculation and not true to my market.
also, we have extremely high property taxes in my area. Last time I checked, 15% Which would be $3200 for 2016

Originally posted by @Marcus Johnson :

Sorry I was using the voice feature on my iPhone and it miss typed. What a mean is $66 per door isn’t a good deal imo. Leaves you no wiggle room should taxes go up like-mind did or something unexpected happens when you have a huge expense and you noe you don’t have cash for for years upon years. I didn’t not want anything less than $250 per door in duplexes.

 Is that a typical number for you area? If so, I need to move to out of state investments.
Ive been looking for about a year now getting cut out of deals for not be a cash buyer and not being able to afford the $120K+ deals at the moments and this is one of the best deals i've found since my first.

I have a duplex in South East Minneapolis, which is an up and coming area where rents have skyrocketed in the past for years since I bought it for list price in 2014 @ 179k w/ 25% DP.  I've put around 8k into rehabs doing most of the work myself on the cheap.  The house already had new windows, furnaces, water heaters and roof.   I manage it myself.   Since I did that work up front, I haven't had to do anything for the past 2 years except collect checks.  The rental income for both units is $2200 a month.  The duplex cash flowed in 2016 and 2017 for $750 a month after all expensese, capex and paying myself for my time.   

I just did a cash out refinance and took out 50k since the property is now worth 235k and I owed 124k.    Now my cash flow I've projected should be around $475 each month.   That's a bit under where I normally like to be, but I know that the property is quite stable since I stay on top of things and do everything myself, plus I have capex saved up for expected repairs, so in this case that is acceptable.  The other thing you should know is that in 2017 the city of Minespolis decided that it would be fun if my taxes go up $1000 more a year.  But luckily I could absorb that hit in 2017, because I had a generous cash flow due to the large margin.  

So my concern for you on hoping that $66.00 a door will work out is IMO extremely risky and one change in your situation will greatly put you in the red.   So I personally wouldn't suggest doing this investment.  I myself am looking for another property and have 60k to put down as a DP, but I'm not going to buy a property just because I'm desperate to own something.  And I'm not going to go outside the areas of Minneapolis that I'm not familiar with, just to get another deal.  I have my plan and it's worked to buiild up my networth where it is today both with RE and the stock market, so my plan works and is proven.   

I wish the best for you.  

Originally posted by @Tyler Witkowski :

Thank you everyone for replying to this, all of you have good info to reflect on.
To answer everyone at once, I have put in water/ sewer, Garbage, Electric, Vacancy @5%, Maitenance @5%, Capex @10% and management @10%. Im managing this myself.

Ive included all of my expenses so I believe. The building was built in the 60s and in great shape. There is about $20k In repairs, I'm factoring it at $25k with a purchase price of $55k. I see other buildings in the area going for $75k and back in 2007 this property sold for $120k, but thats not todays market. The down payment is $11k, I have others putting in $5k and myself $6k to get this deal. So with the $20K in repairs, that would be fixing all major problems with building, Including 2 new furnaces, 2 Hot water heaters, 2 bathroom remodels, and new flooring in 1 unit. I see it as this would bring down the maintenance and capex costs, leaving me with the cashflow that I need next year when I can tweek the numbers to real maintenance costs. Since i'm unexperienced i'm putting in larger numbers to save, for those "oh ****" moments. its a foreclosure and that last owner remodeled 1 unit completely and looks very nice. 

This will not be owner occupied.

Have you figured out financing for this deal? For most duplexes you will need 20% down at a minimum. Your $11k meets this but that still doesn't account for the repairs you have to make. If you are paying these out of pocket this will drop your ROI a ton. If you have a construction loan to cover the repairs you have to use licensed contractors for the repairs. Not sure about your area but $25k for the repairs mentioned above may get burned up pretty quickly if you aren't able to subcontract. That is unless your remodels include lipstick jobs and cheap carpet.

I personally wouldn't take this deal, too much work, too little reward with what you have presented. Sure your ROI could calc to a favorable number but that is only because you have a low cost. If you are inexperienced you would get a lot of experience from taking this on. I would just be certain that your after repair value has enough wiggle room in case your cash flow takes a hit and you need to sell.

@Marcus Johnson
That is an amazing property that you have, I wish that my market would allow for this type of cashflow. It simply doesn't though, Its in a state and city where people are fleeing because of our tax rates. The ones that stay are people with stable jobs in hospitals, manufacturing, and jobs like ups/ fedex distributers. Jobs I see as economically stable but with all that said. Rents stay about where they are. 

I understand where you are coming from and with your goals of extreme cashflow, that is a beautiful number. I just dont think its physically capable in my market. the only things that get that are d type properties in the worst of the city. Im not going to deal with that type of clientele. Im going to reflect on this and see where it takes me as the deal unfolds itself. I might be backing out as of right now but if i get more final numbers that make this deal more stable I might still go through. Who knows. I see my market climbing within the next 3-5 years as the city is trying to pump money into it and save the city as a whole.

@Tyler Witkowski

Unfortunately Illinois is having a movement, people are leaving by the masses according to the 2017 Consensus.


https://www.youtube.com/watch?v=xSuZS5EiB8E

I hear ya @Tyler Witkowski . Very tempting with a large ROI but in the end, you know what to do. Let the guys who say deals are getting tighter buy those deals, save your cash, and OWN IT during the next cycle. I've had to go outside my ideal market recently but deals are still around that meet our criteria, just keep swimming Dory!

I talk about my tripod of investing here: https://www.biggerpockets.com/blogs/8160/52878-how...

We've been highly successful with this process and while the blog posting does state $200/door that has changed as that is in an asset class I've figured out I don't want to be in.  

Cheers to patience and finding GREAT deals!

Originally posted by @John Woodrich :
Originally posted by @Tyler Witkowski:

Thank you everyone for replying to this, all of you have good info to reflect on.
To answer everyone at once, I have put in water/ sewer, Garbage, Electric, Vacancy @5%, Maitenance @5%, Capex @10% and management @10%. Im managing this myself.

Ive included all of my expenses so I believe. The building was built in the 60s and in great shape. There is about $20k In repairs, I'm factoring it at $25k with a purchase price of $55k. I see other buildings in the area going for $75k and back in 2007 this property sold for $120k, but thats not todays market. The down payment is $11k, I have others putting in $5k and myself $6k to get this deal. So with the $20K in repairs, that would be fixing all major problems with building, Including 2 new furnaces, 2 Hot water heaters, 2 bathroom remodels, and new flooring in 1 unit. I see it as this would bring down the maintenance and capex costs, leaving me with the cashflow that I need next year when I can tweek the numbers to real maintenance costs. Since i'm unexperienced i'm putting in larger numbers to save, for those "oh ****" moments. its a foreclosure and that last owner remodeled 1 unit completely and looks very nice. 

This will not be owner occupied.

Have you figured out financing for this deal? For most duplexes you will need 20% down at a minimum. Your $11k meets this but that still doesn't account for the repairs you have to make. If you are paying these out of pocket this will drop your ROI a ton. If you have a construction loan to cover the repairs you have to use licensed contractors for the repairs. Not sure about your area but $25k for the repairs mentioned above may get burned up pretty quickly if you aren't able to subcontract. That is unless your remodels include lipstick jobs and cheap carpet.

I personally wouldn't take this deal, too much work, too little reward with what you have presented. Sure your ROI could calc to a favorable number but that is only because you have a low cost. If you are inexperienced you would get a lot of experience from taking this on. I would just be certain that your after repair value has enough wiggle room in case your cash flow takes a hit and you need to sell.

I do have financing for my deal, I can take a rehab loan out with using anyone that I want. either myself or a licensed contractor. The best rehab deal I have found around my area.
All I would need is the $11k down, Ive used this rehab deal once before on my current duplex where I have done all the work myself.
You are right though, I keep going to the idea of not enough reward for the work/ risk 
The $25k repairs is from my contractor, who does this for a lot of banks in the area. Not much work needed.
furnaces, bathroom repairs, new load baring wall that last person removed, paint, vinyl plank flooring. and thats just about it.

@Tyler Witkowski

Hi Tyler, 

Maybe you should listen to your intuition. Problem with condos/duplexes is that they have to stay rented. One vacant month and CIAO to your ROI. If you have a huge portfolio, then you can absorb the loss, but only two assets, you're 50% vacant. The market is still appreciating, so you may get some appreciation, but I would not calculate that into gains because that could change very quickly.

Good luck

Gino

@Tyler Witkowski This is tricky Tyler. 

Sometimes, we just have to go with our gut feeling and walk away. If the deal doesn't meet your underwriting criterion of $100/door, perhaps, you may want to keep looking for the next deal, you know. 

Hope this helps. Goodluck. Thanks! - Ola 

This is great insight guys, thank you for helping me out. It looks like I knew the answer from the beginning, yet I didn't want to see it. 

Back to the drawing board.

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