Need advise on a property in Philadelphia, good deal or no deal

17 Replies

I just started investing in real estate. This is my first out of state property that I am looking to buy. I find this condo house in philadelphia, purchase price is 173,000 all cash payment. Rent in the area is 1200 a month. Need to replace the floor and some minor touch ups and a fresh coat of paint, would probably cost around 5000. After I included all the vacancy rates and expenses per month, there is $560 per month cash flow. The purchase cap rate is 3.89% and cash on cash ROI is 3.67%. I am not sure whether this is a good deal or not. (If I put 40%down, I will have a negative cash flow on this property (-$20)) I feel the numbers are not very promising, but yet I also want to take a step forward. Thank you in advance for your thoughts.

Hi @Jane Lu ,

To be blunt, this is not a good deal. Most investors aim to make 8%+ all cash, 13%+ if they finance it.

The busiest parts of New York tend to be difficult to invest in, so I'd consider going out of your local market if you're looking for the best returns (Memphis, Kansas City, Atlanta, Indianapolis, Milwaukee, St. Louis, Cincinnati)

The BP marketplace has lots of properties (pre- and post-rehab) for sale with good returns, and there are also companies that sell "turnkey" properties, meaning they are rehabbed and have a tenant and property management in place, all they need is someone to buy the rental.

Excited to hear about your next deal!

Originally posted by @Jane Lu :

I just started investing in real estate. This is my first out of state property that I am looking to buy. I find this condo house in philadelphia, purchase price is 173,000 all cash payment. Rent in the area is 1200 a month. Need to replace the floor and some minor touch ups and a fresh coat of paint, would probably cost around 5000. After I included all the vacancy rates and expenses per month, there is $560 per month cash flow. The purchase cap rate is 3.89% and cash on cash ROI is 3.67%. I am not sure whether this is a good deal or not. (If I put 40%down, I will have a negative cash flow on this property (-$20)) I feel the numbers are not very promising, but yet I also want to take a step forward. Thank you in advance for your thoughts.

 No, no, no. You can buy like 3 or 4 good duplexes depending on the area with 25% down, conventional loan. Start with 1 and see how it goes. 

I've heard on many podcasts if it only cash flows on an all cash purchase it's not a good deal. Why would you want to tie up all your money? Don't buy just to buy. There are good deals out there. Just be patient and keep analyzing.

Hi Jane,

Welcome to BP!

I think the amount of monies you are into this one transaction you can split in to a few better performing investment properties and obtain mortgages where you are leaving monies for deferred maintenance, vacancy and proper reserves. Again, depending on your purchase capability with mortgages and appetite of varied neighborhood buy in will be important to understand first.

Let me know if you have any questions.

Regards

Joe Scorese

Unless you think this is a neighborhood with strong appreciation potential, I’m going to say, no, not a good deal. For what it’s worth I also like rowhomes in Philly for that price point a lot more than condos.

@Jane Lu you really need to define your criteria and minimum ROI that you expect so that you can recognize a good deal when you see one. I wouldn't consider the returns that you stated anywhere close to acceptable. You may want to check your calculations however. You have a higher CAP rate on a cash purchase than cash on cash on a financed purchase which would be highly unusual. Your COC should be higher than your CAP rate.

@Jane Lu

$1200 a month is not even 1% of the purchase price. It's a guideline used by most investors and if it doesn't meet that then typically its a no go. 

For me its not a deal based on that. 

All the best to you,

Jorge

Originally posted by @Jorge Ruiz :

@Jane Lu

$1200 a month is not even 1% of the purchase price. It's a guideline used by most investors and if it doesn't meet that then typically its a no go. 

For me its not a deal based on that. 

All the best to you,

Jorge

 Is it 1% of the of the total price or of the amount of cash you put in the deal, in case of conventional loan? As a newbie I am confused about that rule .

Lana - it is 1% of the total price.  Also even if the cap rate meets your required number you still need to look at comparables.  For example you want an 8% cap rate or better.  Investment 1 has a 9% cap rate - this meets your number however the comparables that SOLD around investment 1 had cap rates of 12, 11, 13, and 10.  So you do not have as great a deal as you think.  11.5 is the average cap so you are over paying.  Yes you may still make money on the investment yet you probably could have gotten a better deal and if I buy from you I will be buying at the 11.5 or better cap rate price.

Originally posted by @Lewis Christman :

Lana - it is 1% of the total price.  Also even if the cap rate meets your required number you still need to look at comparables.  For example you want an 8% cap rate or better.  Investment 1 has a 9% cap rate - this meets your number however the comparables that SOLD around investment 1 had cap rates of 12, 11, 13, and 10.  So you do not have as great a deal as you think.  11.5 is the average cap so you are over paying.  Yes you may still make money on the investment yet you probably could have gotten a better deal and if I buy from you I will be buying at the 11.5 or better cap rate price.

 Do you use gross or net income to calculate that cap rate?

Thank you

Originally posted by @Lewis Christman :

Lana Lee - net operating income

We are very new and probably made a wrong decision. But help me understand if at list we are not loosing money. We bought a duplex in B area for $230k that's how much they are here, the recent comps were 255k and up. Very good condition , updated , managing ourselves, loan care ourselves. Rent $2025. $1218 in PITI, $50 water, trash. Can't think of any other monthly expenses .

Mostly as retirement savings.

I'm not sure of your exact question yet other expenses would be repairs as needed, marketing for new tenants.  If you are making money that is the key to me.  I need positive cash and I look for other metrics. You are under 1% (rent to purchase price) where a comp at 255K might be 2,550 in rent or more (1% or more).

Originally posted by @Lewis Christman :

I'm not sure of your exact question yet other expenses would be repairs as needed, marketing for new tenants.  If you are making money that is the key to me.  I need positive cash and I look for other metrics. You are under 1% (rent to purchase price) where a comp at 255K might be 2,550 in rent or more (1% or more).

 I market myself for the tenants. I constantly monitor rents in that area of cooky cutter duplexes and they are pretty much the same. But how do you calculate possible repairs and vacancies? And how much cash flow is considered good?

Those are subjective.  What has been your vacancy since you owned the place?  Apply that to a new one.  You could also assume 8% which is typically one month per unit and assume 10% for repairs.  You may not use all 10% in one year yet you are going replace water heaters, heating systems at some point.  What is the cost? How long of a life does it have will tell you how much of a repair fund you should be accumulating.

Also cash flow is for you to decide as well.  Someone may want $100 per door after all expenses / mtg / taxes are paid and someone else may decide they want $200.

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