Opinions on this property I'm looking at tomorrow

15 Replies

BP,

I currently have 4 duplexes, probably C properties.  This was my first deal and I probably over-payed and took on properties that needed more work than I could have anticipated but I made sure the rents/sale price ration was high to cover it so It hasn't wiped me out... Also, I have learned a lot from this experience.  So that is some background of where I am at..

I am looking to do my next deal soon and am looking at a property tomorrow.  I'm not necessarily asking anyone if I should go for it but wanted to know if you saw any red flag in the numbers?  These would probably be B properties and are very well maintained, and simple brick structures.  There are two lots that each have 2 up an down duplexes on them.  Here are the numbers for 1 of the lots. They are basically identical.

$2300 rent per month (4 units from 2 duplexes in same deed)

$161,000 asking price

All utilities payed by tenants, including water:)

Taxes are quite high at $6500.  However, the assessed price is about $40-50k higher than what i expect to purchase this for so i think I can get the taxes down to around $5k to $5.5k.  I did this on one of my other properties already

With 5% financing at 20 years, $250 / month for maintenance and $150 for insurance i believe I can CF $500-600 / month. I can easily finance the DP with a HELOC I have at 3% and can get a 10/20 loan from a small local bank at around 5%.

Does anyone see any red flags in these numbers? After looking at hundreds of properties on the MLS over the last 2 years, this one definitely is at the higher end of cashflow potential. I would love to hear your opinions. Thanks!

Kyle

The biggest thing that stands out to me is the 5% down financing...do you know a local lender that is offering this on investment properties?  Typically to get anything below 20% down you'll either have to owner occupy or get creative (perhaps owner financing?).

Medium logoMichael Seeker MBA, Renting502 | http://www.Renting502.com | Podcast Guest on Show #94

Hi Michael,

Thanks for responding! The way I posted it isn't very clear. I would be putting a 20% DP on the loan, payed out of a HELOC I have that is at 3% interest. The loan from the bank will be at 5% interest for a 20 year loan that becomes variable after 10 years. I have found the same to be true in Pittsburgh that the minimum is 20% DP. Any further thoughts on this?

Thanks,

Kyle

Did you include the heloc payment in your assumption?

Bob,

Great question because I almost missed that. i did include the interest from the HELOC in to it.

Thanks,

Kyle

I know these properties! I've considered them myself but I haven't been brave enough to pull the trigger on anything yet. My analysis showed cash flow around $3000/yr for each set but with traditional financing and assuming is pay water/sewer.

Hi Emily, my analysis came in a little higher because all of the water / sewer / garbage is payed by the tenants.  They are very well maintained.  The only issue with them i see is that the boilers in them are pretty old and the hill is incredibly steep.  When i pulled in to the driveway my right rear wheel came off the ground!  So the hill might be a deal breaker for me.  Outside of those things they are great.

Yes, Kyle, if I take out the water/sewer I get around $600/mo cash flow per set. The hills are VERY steep. Actually, my husband said the hills there might be a deal breaker for him too. 

Numbers look good. Will you be managing them personally? Either way, I'd put in a management fee whether you self manage or pay for it. This will give you an accurate financial pro forma because any investment property should cover management fees while meeting your financial metrics.

Emily, that is exactly what I got.  Andrew, thanks for the tip on remaining conservative to make sure we will see real cashflow after all said and done.

The challenge seems to be finding a property on the MLS that is well maintained and also has strong cashflow without having a glaring deficiency such as an extremely steep hill. This is why I joined this sight, to get answers to questions like these:). I need to do some more reading.

Originally posted by @Thorney Gibson :

what is a HELOC loan?

 Home Equity Line Of Credit  These are usually a second loan on your principal residence. Usually structured so that you can take out and pay back money at will. Kind of like a cash advance credit card with your house as collateral. 

Medium crab1 copyNed Carey, Crab Properties LLC | http://baltimorerealestateinvestingblog.com/

Originally posted by @Ned Carey :
Originally posted by @Thorney Gibson:

what is a HELOC loan?

 Home Equity Line Of Credit  These are usually a second loan on your principal residence. Usually structured so that you can take out and pay back money at will. Kind of like a cash advance credit card with your house as collateral. 

 Thanks. I need to learn what all abverations mean.

I'm a little late to this discussion, but it looks like a no brainer to me. The first thing I always look at is the GRM (Gross Revenue Multiplier). My cutoff is 100X. Anything better than that deserves a serious look. Paying 3% on your Heloc is the cheapest equity financing you'll ever get, I'm happy if I can get someone to accept an overall IRR of 15% on deals that aren't this nice. And of course the interest is tax deductible, an even better bonus. I' don't know the area, and it sounds like the steepness of the hills might be an issue. Structural engineering report would probably be in order - likely at a cost of $2,500 or so....but....due diligence costs that kill a deal have been one of my best investments.

Question - what would it cost to purchase developable multi-family raw land in the area? Second question - how much is your purchase price vs. building? If it's under 50% than you are probably covered just from the value of the land. What factor are you using for rent increases? If, for instance, you can manage a 5%/year increase and keep costs relatively stable, that should translate into a substantial increase in property value. My rule of thumb (subject to variables, of course) is that every dollar of monthly rent increase translates into a 100x increase of value if there are capital expenditures involved, and 150X if there are no capital expenses to get there. So, if you increase rents 5% over the next year (an increase of $115/month, doesn't sound unreasonable), your property value should increase by anywhere from $11,500 to $17,250 - probably somewhere between those two numbers. Let's call it $14,000. Add the roughly $3,600 in free cash flow and you have a first year return of $17,600, which is 55% total one year return on your Heloc that is costing 3%. If you get no increase you still get an 11% return on 3% cost of equity. 

IMHO

Douglas, thanks for your reply and the analysis on the numbers. I havent heard of the GRM yet. Can you explain how that is calculated and how you use the 100x figure to determine how good a deal is? I did some searches on GRM and what i found isnt the same calc you are using.

GRM is simply a multiplier of total revenue. If, for example, you have $1,000/month in total rent and you multiply it by 100 you come up with a figure, in this case $100,000, that one would consider paying for a property. The acceptable multiplier can be adjusted either way. For instance, if tenants are paying for electricity and heat you may want to consider a higher multiplier, say 120X. In that instance you would be willing to pay a bit more for the property because the expenses will be lower. If, however, it is a c class property and most of the tenants are all bills paid, you may want to adjust it as low as 80X

It is a "front of the envelope" type of calculation. Obviously more detailed analysis has to follow, but it has served me well through the years.