What do you think of this deal?

Question

Hi All - I am looking to make an offer on a two unit town home. Both units are rented out with long term tenants in place. Below is a screenshot of the model results but see below for a break out of the assumptions:

• Purchase price = List price (room for negotiation)
• Closing Costs = Estimate from lender
• Down Payment = requirement from lender @ 25%
• Interest rate = rate offered on a two unit rental from lender
• Total rents/Month = current rents in place (room to raise based on market)
• Property taxes, Insurance, Water/Sewer, Trash removal = all reflect actual amounts paid by current owner
• Vacancy rate = 10% of gross rent
• Cap Ex = 5% of gross rent
• Maintenance & Repairs = 5% of gross rent
• Monthly free cash flow = $155
• Total ROI = 7.14%

My question is simple, do you think this is a good deal? Is this a deal you would accept in todays market?

I will offer less than the $200K its advertised for, trying to get it for $190K, which will improve the free cash flow and ROI slightly. The model below more accurately reflects a worse case scenario rather than the full potential of the property, as rents can be increased (need to see current lease in place to know by how much and when), and purchase price can be lower.

Let me know your thoughts!

Jon Kelly · Answer

@Matt Bacenet it's a better deal at $175k, but still not something I would pursue. Everyone is different, but 5% COC is way too low. I target 12% minimum.

How much will it cost to get rents up to market?

Your closing costs are extremely high as well. If you're including 1 year of taxes and insurance in escrow, then you should reduce your first year expenses accordingly.

Matt B. · Answer

Jon - You brought up some valid points! I adjusted vacancy to be 9%, which works out to be about 1 month per year for turnover and paint. I also increased the insurance to $1,400. I've had some bad experience with property managers so it will take an act of god to get me to use one again.

I agree the property is over priced for what it is. Our realtor brought it us and it was the best out of the bunch. The property has sat on the market for about a month now which confirms it is over priced. As of now, once I see the property, assuming that goes well, I intend to offer $175K. That will get me closer in line with the 1% rule, cash flow $117 per door, and a little over 5% COC. Although still not ideal, I think a 5% COC and 9.7% ROI isn't bad as I do still have upside potential in the rent amounts.

What do you think of the deal @ $175K?

Jon Kelly · Answer

@Matt Bacenet Does 3% CoC and $80/door meet your goals? Probably not. This property is priced based on future performance, and it currently does not meet the 1% rule. It may take you 1+ year(s) and $10k/unit to increase rents to $1,000/door. Even in today's market there are better deals out there.Your assumptions are reasonable. I would make a few changes: reduce vacancy to 5-7.5%, include Property Management costs of 10% (even if you're self managing), increase insurance to $1,400+ (I know you mentioned this was actual from the seller, but it looks very light).

What do you think of this deal?

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