I am trying to get into my first deal which happens to be a fourplex in Miami Florida (neighborhood of Allapattah). My strategy is to use FHA financing to allow me to put down 3.5% to basically get me in the game, live in one unit for 12 months, and get out of there to rent out the fourth unit. I am looking on the MLS for most of my deals that works with my price range. I have a total of 25k for a downpayment.
Currently FHA allows a max price of 550k for any residential property with 1-4 units (I am sure you already know this). The property I just made an offer on has an asking price of $550,000. All the units are currently rented out at $1,100 per month (month to month leases). All expenses are reported at $13,000 (25%) by owner. Vacancies were reported at 0%. My mortgage payment is 30 years at 5% ($34,190 annually - principle plus interest). With those numbers I would cashflow $2,969 per year with current rents from year 1.
According to most strategies out there for investors, it is best to bump up expenses to 50% and vacancies to 10% so if anything happens like an economic downturn or something breaks I wont lose my shirt.
So for my analysis I bumped up the expenses (to 50%) and vacancies (to 10%). With that said at that price of 550k I would negatively cash flow annually $-10,670 ($47,520 gross rent - $24,000 expenses - $34,190 mortgage). Its also worth mentioning that rents are nearly at the top of market at $1,100 for comps in the area. So I bumped the asking price down to the cap rate of that area 7.8% and got a price of $301,538 and made an offer at $300,000.
That puts my new price of $300,000, expenses ate 50% ($24,000), vacancies ($5,280), and mortgage ($18,649). I would cash flow $4,871 annually or $405 per month. Thats not a huge number but its something I could definitely work with assuming something doesn't go wrong like bad roof or plumbing (which owners says is in good condition). Its also worth mentioning the owner bought this property last year from previous owner for $490,000. After my analysis I can see why they might be wanting to sell so soon.
So my question is, did I analyze this correctly? What are your thoughts on my asking price and the way I got my numbers? Am I on the right track here?
Thanks for your time!!
Yes your method was good but you will want to use a rental property calculator. On BP they have one but until you are a pro member (which I am going to become soon), you can only use it 5 times. There are other ones out there. I used one on my first deal after learning of BP and the cash flow is pretty close. There are so many other expenses to take into account but your quick and dirty method kept you out of a mess. I have learned from the podcasts that you make your money going in and looking to see where you can add value. Listen to the Podcasts show 131 by Serge Shukhat
I hope this helps,
The cap rate seems to be to compressed would I be wrong
@Account Closed those are the cap rates for that neighborhood approximately 7%-8%. Compared to south beach where caps are around 4% not to bad.
You could go under contract with specific contingencies like financing and inspections. What is your exit strategy?
@Kris Aikat Yes I could. But to agree to the overpriced 550k (a price I know won't work) and I can tell the property is in good shape dont know if that would be smart on my part. Exit strategy is sell in 5 years, increase rents as much as possible, and get into a bigger deal. With my analysis I buy at 300k and it will be worth not much more than 450k conservatively (less than current asking price).