Buying a 15 cap in a not so good area

10 Replies

I am buying an off market deal, the numbers come out to be a 15ish cap.

The neighborhood is decent, dont expect value to rise like the rest of the market.

The property has strong rental figures, around 10,500k a month.  Property selling for 500k, taxes 22k

Little work needs to be done.

What do you guys think?  I want to be able to get at least half my money on the refi.  What do you guys think?  

@Neil P. OK to press forward on good income property even if it does not have a good prospect of "value added" looking for deals with value added might reduce your cash flow and in the end weaken your position going forward. Getting a loan based on the prospect "value added" does not exist. income is paramount

$ right NOW is what pays the mortgage 

I would still want to really get hands around on what work needs to be done. If you got your own maintenance staff already, then that makes things easier. Also, I would ask to see the bank records on how well people pay their rent but if all checks out.. sounds like something you might want pursue 

@Neil P. as Charley C says plus. Check prior listings and sales. Often 'off market' deals were on market deals that fell through for reasons of no money due to appraisals, or defects, or both. Check it out thoroughly. What is the tenant class? Are you LL enough to handle the tenants; or will they train you to suit them?

Make your offer subject to inspection of property and financials-including leases and rent roll. I would get Estoppel Certs signed by LL and tenant. Is the building fully occupied? Do you have a licensed inspector in mind?

Check liens, title, unpaid bills. Yuck those taxes! Flood zone? Garbage paid up? Insurance coverage?

Who are you dealing with-seller? Broker? Are you experienced enough to go without a buyers agent-if not get one? 

This could be a very good deal, or a very bad deal-you need to make sure it will be a very good deal.

@Charley C. Minimal work.  I would do 5k a unit say in the first year. 9 units.  Yes i got my own staff.  So your saying if your just getting started go after the cash for first not the value.  But then how do you move to mulitiple properties quick?  Getting that REFI out and having a large chunk to move ?

@Bjorn Ahlblad Thanks for all those details "Estoppel Certs signed by LL and tenant" what if they are unwilling too.  Off market deal.

@Neil P. first to answer your question (basically how to accumulate more properties) If its not your cash , then its the banks or other peoples (I prefer a small local bank) When getting a loan? Nothing speaks louder than the power of the monthly income. If you got good stable income, the equity will absolutely take care of its self. Raw land for example? yea its collateral but its not nearly as impressive for collateral because it does not pay the note. When you fix up a property, one year later, what you spent on it is not as big of deal but hard cost receipts may play in to it, you have some new renters that are paying more (tells the appraiser that when the old tenant moves out, you are renting it for more), the before and after pics say a lot too. Then you got some equity for a down payment on another deal.. year may be sooner if your lucky

I hope you are just looking at a niche deal that most investors over look, that said. In my life, I have seen really good deals and even these niche deals all had a reason "why" it was so cheap. If you can't find that reason "why" , don't pull the trigger until you do. @Bjorn Ahlblad laid out a good strategy in uncovering the "whys". The "whys" are not a bad thing if you know what they are and have a solid plan on how to handle it.

 AND please do not over look weather or not you got an adjacent sue happy neighbor causing trouble or some kind of legal claim (one of the biggest "whys" that I found) Find the "whys" and I might have some good strategy for you.

Its sounds like the kind of niche deal I like to do but I stay close to home in Texas

Good luck

@Neil P. just a question ... You only mention the taxes. You also have to think about insurance, R&M, prop management fee. Are the utilities included in the rent? How much are the utilities? You also have to factor in vacancy and any concessions the owner may have given to the tenants. Do you have these expense line items broken down? If so, that would probably give you a better indication of whether this deal has the merit or not. Good luck

@Charley C. Have you ever ran into the issue of debt income ratio? I can’t seem to roll houses the way others do . This will be my 3rd purchase

@Neil P. How your lender counts income is a big key in your growth. You got to stick with Banks that will at least count the income of the property you are buying. Small hungry banks will in most cases do count the rental income your seller is getting, big national banks will not in most cases.  You might want to look for different lenders if they are not allowing you to use at least 90% of  rent as income. Particularly if you got enforceable leases with people living there on the subject property being purchased. When I look for funding, the first question is how the underwriter will count income. If the loan officer beats around the bush or he says "it depends" way to many times and does not want to dig deep with questions until after he/she sees where you filled out their application, just keep moving, bunch of losers low lifes that really make money on car loans and credit cards.

Do your own loan application.. YOU do one that can be universally accepted by all banks, dont over sell or puff who you are and leave stuff out they will find later, it waste their time and yours.  If this is #3 then you know the big 3, Balance sheet, Cashflow, Credit. If you are writing off too much on the last 3 years of your tax return, that's going to a problem. if you don't have "net income" to pay taxes on, then you don't have small bank financing period. Make your large purchases fit on to the space of the tax return as depreciating  equipment purchases.. deprecation never hurts you in an debt to income ratio. 

You must to learn what all banks universally will and will not count as income and what they count as expenses 

Now days, I am building new and gave up trying to find little apartment deals. I look for land, then build on it. My lender(s) I use count the rent and expenses that the appraiser says I will get in the future (that takes a solid track record to convince them). Got to show some reserves of course. I would still  rather do what you're doing since you got rent coming in on the first day, my deals take about a year from the time I buy the land, design it , build it and rent it to 100% occupancy .. very slow going but it works. My growth is more like a firm oak tree and not like a weed that blows over in the wind. Income growth, its what makes you strong.