42% ROI: What am I missing???

6 Replies

Hey there, so I'm in negotiations with a seller of 3 condos for $105K.  These are my numbers below...this is a 10 year balloon at 6% interest amortized over 30 years.  At the end of 10 years I'd owe $80K (which I'll pay extra on the principle monthly,so I don't owe anything come balloon time).  Is there any reason I shouldn't take this deal?  

Also, how do you calculate the reduced interest payment when you make an extra principle payment? I can see this getting very complicated if I make extra monthly principle payments.  Are there certain different types of amortization methods that I need to decide on and put int he contract so we are calculating interest payments the same way?

Thanks

Net IncomeOfferDown PaymentLoan AmountMortgageP. TaxInsurMaintenanceManagement FeeHOATotal Fees# of UnitsIncome / UnitGross / MonthROI
$348$105,000$10,000$95,000$570$125$108$92$185$417$1,4663$615$1,84542%

Easy Answer first...…...there are many calculators, spreadsheets, apps on line that allow you to factor in extra amounts, extra payments, one time adds, etc to help  you determine the mortgage amortizations.  

Your numbers are kind of hard to read.  Off hand:

- your missing CAP EX which is major repairs that will come up....normally 5-10%;

 -  you need to factor in closing/buying costs unless it is a private loan.

 -  I would expect unless you have already secured your financing, you will need 20-25% down, not ten.  But you may already have that worked out...I don't know.  

- You don't have any utility costs....these may all be paid by HOA/renter but normally not.

 - You don't include any vacancy contingency.  This should be a solid 8%.

Your analysis is very cursory (just being honest) but as a first glance, it is not terrible.

And again, I cannot read your numbers real well so I might have this all messed up.  

if your down goes up to 20k, and your expenses go up by 200-400 dollars a month (vacancy, Cap Ex, utilities, etc) your return number will go down - significantly.  At 120.00 bucks a door that is not a great return regardless of the percentages.  And I think that goes down.  

Two cents from a newbie.  

Lets see what the experts say.  

Thanks Patrick.  The down payment is what we agreed to...this is owner financing.

Cap Ex I was using the maintenance charge at 5% but I guess that is different.  

Tenants pay utility costs.

Closing costs will be paid by the seller besides the normal pre payment of insurances that the buyer owes. 

On my screen the numbers are in an excel table and pretty clear...weird that it didn't come through on yours.

Thanks

Chris

ROI would be - net income /cash invested

Annual rent revenue minus expenses for the year equal net income. Also principal payments are not an expense. 

If your annual income was $4,200.00 you would have a 42% ROI. Your investment was $10,000

Now if you actually had zero of your own money invested then your ROI would be infinite. Free money.

Originally posted by @Christopher G. :

Thanks Patrick.  The down payment is what we agreed to...this is owner financing.

Cap Ex I was using the maintenance charge at 5% but I guess that is different.  

Tenants pay utility costs.

Closing costs will be paid by the seller besides the normal pre payment of insurances that the buyer owes. 

On my screen the numbers are in an excel table and pretty clear...weird that it didn't come through on yours.

Thanks

Chris

CapEx expenses are for expenses that can be depreciated (i.e. a new roof, new HVAC, etc.). They are generally fewer and farther between, but they are higher dollar items. If your big ticket items on this property have all been replaced within the last 5-years, you can get by with less for your CapEx expenses. Otherwise, build in 5%, until you have at least the cost of a new HVAC unit each door in your maintenance account.

The Repair category is also known as OpEx.  Those are things that are standard operating expenses and don't do anything to extend the life of the property.  (i.e. plumbers cleaning out tree roots from your septic lines or having windows replaced due to vandalism)

Also, you absolutely have to account for vacancy.  What % you set aside to cover potential vacancies is going to vary based upon the specifics of your property and your market.  Since you're purchasing properties that have a rental history, the current owner should be able to provide details and records to prove the properties occupancy history.  At a minimum I would say 8%.  In some markets, for some properties you might have to go to 10%.

its a 1.75% deal, that 42% ROI is based on your down payment amount, 1.75% is pretty good especially for a no value add deal, a couple things tough, there is no vacancy in the figure, with 3 units you will have some vacancy, also reapirs and maintinance, and what is the liquidity of the HOA and potentil for a large special assesment in the near future like a roof, sidiing windows, Pool repair ect. Also Know Condos tend to be the last to rise in a hot market, and first to fall in a declining market, with larger swings than houses. you dont have control of financibility to a future buyer either, if the HOA becomes insolvent or the level of foreclosures reach a specific level the Secondary market will not lend in that complex, these factors in a downturn push your values significantly lower. if you are in it for the long haul, and plan to be paid off by the end of your loan term fine, no problem, but be prepaired to be stuck with the property when markes change. Just considerations.

@Scott Schultz Thanks, I've since updated my numbers to add vacancy and Op Ex, not sure how I missed those before, (that's why I'm on BP!).  Not going through with the deal at this point.  After all expenses it was less than $100/unit until the loan was paid off in 10 years and I'd have to pay an additional $400+ / month if I didn't want a balloon payment at the end of 10 years.