Is this a good deal?!

19 Replies

Hi BP community!

I have submitted an offer for a three family in a pretty decent neighborhood. It is 3150 square feet, it has 8 bedrooms, three bathrooms, brand new siding, brand new roof, four off street parking spots, updated electrical, and all new windows. The first floor rent is below market price at $975, second unit is vacant, third floor rent is $800. Rent could go as high as $1200 for that area. The annual tax is $3750, the annual insurance is $1300, water and sewage is $200 per month, and basement washer and dryer takes coins.The work needed inside the units are mostly cosmetic where I can do some things myself and whatever else won't cost too much. I'm thinking less than 15k for all three units. The asking price is 310k and I offered 340k with 8k back for closing costs. Is this a good deal and do you think I made a good decision? I ran all the numbers through the BP calculator multiple times and the numbers make sense. All feedback is welcomed. Thank you!

@Lynnette E. I offer 340 because I figure that a lot of big ticket items has been taken care of and it is in a very competitive area. Plus is a multiple offer situation. I'm using a 5 percent conventional loan and ran the number over and over it seem like it still make sense. 

This appears to be a full price deal or higher. I have never bought a property at full price. You should make money the day you buy real estate. Then you want no less than a 15% cash on cash rate of return based on the cash flow. I would also wait for a deal with 15% or more equity the day you buy it. Not a deal to me. Plus, you have to do all of the work to get the rents up to what they should be.

@Dung Nguyen Can you share your analysis? What is your CoC and cap rate? Does it meet your goals?

I see this so many times on BiggerPockets... people ask if something is a good deal without doing or sharing the full analysis. 

I like to analyze properties both ways (1) using their current, or previous 12-months, financials, and (2) using my projections. I tend to make decisions based off of the first analysis, or how the property is currently operating. You're adding another layer of risk when you analyze properties from your projections. For example, you suggest rent can go as high as $1,200, which is a 23% increase from the 1st floor and 50% increase from the 3rd floor. There may be a reason they aren't renting for $1,200. 

I don't know what the 2nd unit rent is, but let's assume $900. Total rent is $2,675, which doesn't come close to the 1% (or 2%) rule at $340k... 

The good news is it appears the big ticket items are updated, so you can likely make your maintenance and capex assumptions low.

@Jon Kelly The rent is low because the tenants have been there for a long time. Once the property is updated rent will be 1200 in that area. I offered 340k with 8k back so that it will cover my closing costs. I am putting in 25k-30k in the property in total (down payment plus renovations) Doing most of the work myself. I ran my numbers on bp calculator. Mortage and all expense(water vacancy 5% cap 5% I'm going to manage this property myself) the total will come to $2470 and once all the units are update rent will be 1200 each .$3600 rental income -2470 expense= 1130. Am I doing it wrong or missing something?

@Stephen J Davis I have been searching for my second rental almost 7 month seen over 100 properties most them either need new roof nor have old electric tube and need major updater all of those above also is in a very bad area. i feel because I'm still new to investing haven't met an agent that can help me get deals that's under market price and if it under market price. i know that you make money the day you buy been hearing so much season investor saying "rather jumped in and learn then sitting on the bench I'm tore between want to get a good deal or just get in and learn.

@Dung Nguyen what I think makes this not a good deal is the assumption that for ~$15K the rents could all be updated to $1200/unit. And if they cannot be, you have a property that simply won't cash flow. Without a lot of experience, in a property like this it's very difficult to forecast rent increases like that. It's not a 20 unit apartment where you know that every unit will rent for the same amount. Say your rents do increase and can be at $2800 a month, at the very most you'd be making based upon your figures $350-$400/month. But my hesitation even with that is using lower CapEx figures and maintenance will eventually come back to hurt you. You'll need to pay out of pocket because you haven't saved enough, or you'll need to revise the amount you save each month to 10% and then you'll be even less profitable. In short, I feel as though there isn't enough rent potential for the value of the property. Hope this at least helps a little.

@Dung Nguyen others have already told you this is not a great deal. I would also echo their thoughts. I could go through the numbers and reasons, but the real simple one is that you are paying over list price and it does not appear to be a turnkey property. I’m only assuming the list price is the retail price since most markets are hot right now. Your basically buying a retail property that needs value add, that’s not adding any value.

I would encourage you to stop competing and control your purchases. Drive for dollars. Go get lost in a neighborhood you’ve not been to and find all the properties with deferred maintenance and hand written for rent signs. Track down the owners and ask them if they want to sale. If you are intentional and consistent with that type of model, you will find some great deals. Good luck

@Dung Nguyen
I still don't get why you are offering 30k above asking. If big ticket items are taken care of already, it should be reflected on the price. Also, I never assume highest rent regardless of the finish. Be conservative with your numbers because we are still in the middle of uncertain times. I'd pass on this, but don't stop looking!

Interest rate 3.125. apr4.187 principle&interest $1430 real state tax321.58 insurance 125. mortage insurance 230.24= $2,097.91 water 175(could be lower cuz of coins ops in basement ) vacant 5% 150 cap5% 150 maintenance %150= total $2722. down plus Reno all in 30k. Its in a b area apartment around there go from 1150-1300. first floor owner family member at 800 third 975 long term tenants situation. second floor vacant. cosmetic update only. place is not turn keys but in good shape. once all rent meet market value at 1200 each = 3600-2722=878x12=10,536/all in (25k-30k=0.3512CoC is my math wrong ? still new to investing help me understand where my math is wrong. asking number is 310k my offer was 340 8k back. But after posting original offer submitted my agent came back to me to revise our number at 320 7 k back for closing cost of we only offer 3k over asking price. but all the number is from my lender running it at 340k. @Johnathan Oh

@Dung Nguyen

I don't think it's necessarily a bad deal, not sure what market or appreciation potential is, but I think most investors here are put off by the fact you have to renovate the property AND are paying above asking. That's not normal, but since it's a traditionally financed loan, what was the bank appraiser's ARV after repairs?

Have you talked to property managers in the area who can confirm the $1200 rent list price in our current climate? I, like you am buying right now and the calendar is against us for sure, I'm assuming it'll be tough to fill vacancies until April. With long term tenants who'll definitely leave with rent increases, you'll want to raise those rents when the tenant pool is better so it'll be a weird 5 months or so. Also legally the increases you are suggesting will be difficult if there is a lease in place or the tenants want to stay as you have to raise it fairly and in increments.

Finally I'd say that when calculating reserves, I use 5% vacancy, 15% repairs/Capex combined, and 10% PM. I know you mentioned self managing but you always want those reserves in there to make it easier to scale and hand that work off.

I think this property could look good in 5 years when rents are realized and even raised but initially you will be losing money the first 12-18 months while it stabilizes.

Good luck!

@Andrew Kougl I know I originally said that I would be offering 22k over but we ended up submitting an offer only 3k over the asking price. As for ARV I am not sure. So basically I'll be doing a house hack for 12 months with this property. The tenants are on a month to month lease and are willing to stay knowing that rent will be increased as renovations are made to the property. My real estate agent who grew up there and whom also rents out apartments in the area confirmed that market price rent is 1200. Going into this property, my goal is to renovate and get rent up to market price while living there, so I am not expecting cash on cash return right away but I know that in 12 months this property will bring back 3600 in rent income. Minus the expenses I am looking at 800+ in cash flow. As for maintenance I am not expecting much needs to be done because a lot of big items are new or have been replaced before purchase. By updating each unit maintenance will be minimum. What do you think? Still a decent deal or do you think it makes sense?

@Dung Nguyen

With my analysis and based on the numbers you provided, I'm seeing cash flow of $213.18/month and based on 30k invested, an 8.5% CoC. Not a great deal, however you shouldn't lose money after the rent increase. It's the mortgage insurance that's killing you. After that's paid down and you can get rid of that it's much better.