Would you do this deal...

Question

OK. I'm brand new to this. I found this property. It is a few miles from a very good area. 
This property is in great shape. It sold for 120K about 5 years ago. I think I can get it for around 53K. I have the cash to buy it outright but some have recomended to get a mortgage anyway. Does the price fall in line with what you would expect for a forclosure?

Would you do the deal?

Here is how the numbers look:
POTENTIAL RENTAL INCOME		$14,400 	Total Potential Income if rented 100%						
Less: Vacancy					$(450)		Assumed 2% Vacancy Factor						
EFFECTIVE RENTAL INCOME	 $13,950

GROSS OPERATING INCOME	 $13,950 		Total Revenue						
															
OPERATING EXPENSES															
Real Estate Taxes			 $2,500 			Property Taxes						
Property Insurance			 $700 																	
Repairs and Maintenance		 $500 									
Utilities					 $150 									
Lawn and Grounds Keeping      $300 									
Miscellaneous			 $300

TOTAL OPERATING EXPENSES			 $4,550 		Sum of Line 6 thru 23						
NET OPERATING INCOME				$9,400 								
Less: Annual Debt Service				 $(2,864)		Total Mortgage Payments						
CASH FLOW BEFORE TAXES			 $6,536 								
Add Back:  Principal Payments			 $864 		Principal Paid on Loan						
- Depreciation						 $(3,818)		Tax Depreciation on Building						
TAXABLE NET INCOME (LOSS)			 $3,582

John Evan Miller · Answer

Looking at your figures and adjusting them for industry standards, here is what I came up with:

$14,400 Gross Rental Income
-$1,440 10% Vacancy Rate (= 1.25 months vacant)
$12,960 Total Gross Income

-$5,792 40% Estimated Expenses (50% Rule includes vacancy)
 $7,168 NOI

-$2,864 Mortgage Payment
$4,304 NOI Before Tax

This would give you a CAP rate of 13.5%. This could be a good investment if the property is in relatively good condition and the rents are at market levels.

I agree with David Beard. Your utilities are low unless the tenants are covering them. Your repairs and maintenance should be around 10% of gross income or close to $1,500.  You need to factor in a capital reserve to replace big ticket items like the furnace and roof. Generally an owner should set aside 3 - 5% of the income.

Before you make an offer, double check all of the profit and loss figures to make sure they are accurate.

If you make an offer, make it contingent to a satisfactory home inspection to make sure this will not be a money pit.

Other than that, looks good based on the information you supplied.

David Beard · Answer

Hi Carlo Seta, it is very difficult to tell you if this is a good deal without knowing more about the neighborhood it is in, and the age/condition of the property.  A "few miles from a very good area" doesn't mean very much, as Oakley and Hyde Park (very nice areas) are adjacent to some very rough areas, as I'm sure you know.  I've gained a fair amount of experience in the Cincinnati market, and own in and around the area.  If you want to PM me, please feel free and we can discuss.

Questions:
* Your utilities are very low, suggesting that tenants have their own water meters.  Is this the case?  I assume tenants pay for their own heat?  Are these furnaces, boiler(s), or electric baseboard?
* Your maintenance looks way too light when you factor in turnover/make-ready expenses (function of your average tenancy and quality of tenant, probably about 18 mths tenancy in multi family), and capital reserves.  At least 15% of gross rent for all of that would be a minimum, and it's usually a good idea to budget out turnover and reserves separately.
* You're going to do all the lease-up and property management?
* Average tenancy of 18 mths equates to vacancy of around 6%, assuming being down one month between tenants.  2% is unrealistic.
* Lawn maintenance will be more.  At least 20 cuts per year at $30-40 per cut, depending on size of the lot, plus snow removal, leaf removal, bush trimming, mulching, etc. 
* How much useful life remains in the roof and mechanicals?  And have the windows been updated?

Uwe S. · Answer

Hello Carlo,
is this an Duplex or only a SFH?
With an Duplex you should calculate with 50% expenses, with an SFH 40%. In either case it should be a good deal at $53k with $7,200 NOI (Duplex) or $8,640 NOI (SFH).
Taxes actual to high but if you can buy it for $53k you can lower ther appraising value at auditors office I hope.

Note: A vacancy of only 2% is very optimistic!

Now to your questions, yes i would do the deal if I have all DD done.
If you have the cash you can maybe lower the price by faster closing, after 12 months a can do a refinance and put a mortage on it.

-Uwe