sub to, yes or no?

Question

i have a possible sub to deal. Seller owes 63,000. Comps out at 72,000. It is a tri-plex with all units rented. After PITI cash flow is $655. We are figuring 10% for property management. Which would bring a monthly cash flow of just over $500/month. Those of you who have done sub to, does this seem like a deal or should we walk away? We do have cash reserve in case of vacancy and would put money away until we had minimum of 6 months in a reserve. There are some repairs needed in near future, but thought we would repair when a there is a vacancy.

Thanks in advance for your advice.

Jana Gruttner · Answer

The downstairs unit is 625 one upper is 325 and one is 400.  2 of the apartments have been rented for at least 6 years and the 3rd is about 1 year.  My initial reaction was no deal, but didn't want to pass up something if I was being too cautious.  I appreciate all of your input.  It helps me make the decision.

Steve Babiak · Answer

So it's a triplex. That means water and sewer and heat might be landlord paid. And rent is like $450 per unit so on the lower end of the income scale, so might be difficult to get and keep good tenants. The current owner is willing to let it go - that should give you cause to explore why.

Jana Gruttner · Answer

According to the 50% rule... monthly total rent is 1350, I should expect 675 in expenses, then also PITI at 695.  This leaves me at -20.00 per month.  The way this looks, it is not a deal.  Am I figuring this right?

Account Closed · Answer

Cash flow isn't Rent minus PITI.  I'd use at least 50% over the long haul, esp. since you are using PM. One month of vacancy and one repair and your number is way off.

That said, I think it's a good deal and would probably do it.  Make sure you use escrow and get title insurance on your buy.  Make sure you get an authorization to release information and specific power of attorney from the seller so you can work with the lender easily and get payoff info when you need to.

John E. · Answer

@Jana Gruttner The net cash flow will not be $500. You've got to account for more expenses because CF does not equal Gross Rent- PITI! The 50% rule is a popular rule on Bigger Pockets that states: 50% of your gross rents will go out the expense column. This does not include your mortgage or other financing you have to take into account for on the property.

If you still clear cash flow after 50-60% of your rent (including PM fees) then it's probably a deal. The expenses will eat you as a landlord if you do not account for them.

It's a conservative rule of thumb that if used in combination w/ other rules & forms of due diligence that can help you rest well at night because you know your true cash flow!