The numbers don't add up. What am I missing?

14 Replies | Houston, Texas

Hello everyone, 

I recently became more serious about real estate investing.  I'm see myself as a buy-and-hold investor as I want passive income.  I'm learning to crunch the numbers.  

Can anyone with more experience tell me why this isn't a good deal (I'm assuming it's not a good deal given how hot the Houston market seems to be and how long it has been on the market)?:

https://www.har.com/12627-ashford-meadow-drive-a-d...

In summary it's a quadplex asking for $259,000 and is 100% leased with Gross Income of $3400/month. Expenses include maintenance at $200/unit or $800 total (Courtesy Patrol, Exterior Building, Grounds, Insurance, Water and Sewer) and water averages around $125/month total.  Taxes last year was $3091or $258/month (I assume this will go up after purchasing). 

At first glance, this passes the 1% rule, which I think is good for Houston?  I have not seen anything that comes close to the 2% rule when comparing recent sales of different areas to lease prices of similar properties in the same areas.  How does a buy-and-hold investor make money in Houston?  

I plugged in the numbers into the Buy-and-Hold calculator.  I used the following values:

Loan: 20% down, 30 years at 4.75%

Vacancy: 10%

Repairs: 12.5%

Cap ex: 12.5%

Management: 12%

There is hardly any cash flow AND I used last year's tax appraisal value.  Is Houston this tight?  

Thanks a bunch in advance. 

@Min Wang Good question. SFH and MFH are totally different ball game. But duplex is not way apart from SFH. It's almost similar. Let me tell you something, looking for just 1% purchase price as rental is old way. If you want to scale, you need to look at DSCR. That's the key figure and many investors don't even know about it. It's called Debt Service Credit Ratio. It's ratio between all your expense and your rental income.

See the screenshot I attached from our excel calculator which took your numbers and I added 10% on repair and maintenance and split expense to insurance and other cost. It should give you an idea. It hows 1.26 DSCR which is not bad at all. Cashflow is not much because you are adding capex which will reduce your cashflow. Many investors take capex is cashflow too since you are not using until their is expense. It's up to you how you want to see it.

Hope this helps. 

@Min Wang I've looked at that property online recently as well. I think the numbers look good. If the updates are done as advertised, I wouldn't use such high numbers for CapEx and/or R&M. Self-managing will also increase your profit.

I'm surprised this one hasn't gone under contract already.

If the above expenses and rental income are correct this deal definitely deserves a hard look... here in NJ we can' t touch these numbers...

Also, how are apartments? Condition? How are mechanicals? IE. heating system, roof, windows? Can rent be bumped up to 900 or 950? What is market rent? I assume these are 1 or 2 bedroom units? Any opportunity to produce more income? garages, basement storage?

As it stands it would be a deal here in NJ market..

good luck, and post some pictures if you can.

thx,

Chris

@Min Wang At first glance this seems to be a pretty solid property. My primary concern with your numbers is the mortgage rate. The fed just hike the rate again and most investors are seeing rates of more like 5-6%. Unless you are already pre-approved and locked in at this rate, I would maybe run the figures again with a higher PITI.

On the other side of the coin, your repairs, capex, and PM seem a bit high. I'm not an MFR guy (as there just isn't as solid a B/B+ market for those in Birmingham) but I'd still wonder why they both warrant 12.5%, unless this is based on historical figures from the current owner. As for the PM fee, most PMs charge between 8-10% of gross rents, so 12% is a little crazy. Again, if this a figure provided to you by the folks who you would keep on to manage, then use it for sure, but if it's an estimate, I'd think you could cut that down a bit by shopping around.

Originally posted by @Vijaianand Thirunageswaram :

@Min Wang Good question. SFH and MFH are totally different ball game. But duplex is not way apart from SFH. It's almost similar. Let me tell you something, looking for just 1% purchase price as rental is old way. If you want to scale, you need to look at DSCR. That's the key figure and many investors don't even know about it. It's called Debt Service Credit Ratio. It's ratio between all your expense and your rental income.

See the screenshot I attached from our excel calculator which took your numbers and I added 10% on repair and maintenance and split expense to insurance and other cost. It should give you an idea. It hows 1.26 DSCR which is not bad at all. Cashflow is not much because you are adding capex which will reduce your cashflow. Many investors take capex is cashflow too since you are not using until their is expense. It's up to you how you want to see it.

Hope this helps. 

"It's called Debt Service Credit Ratio. It's ratio between all your expense and your rental income."

That's not true.  It's your NOI divided by your debt payment.  Most banks want to see that the NOI is at least 1.2 to 1.3x the debt payment.   So if the mortgage is $10k/month they want to see annual NOI be about $150k (or at least a compelling story on how you'll get there.

If it helps, here are the "agent only" notes (below)   It's a good deal, I just don't like that it was 'recently renovated'.  That's always a red flag to me as I feel I'm on the other side of someones flip.   

HCAD had two address.  A tax account ending in 19 and 18.  Per HAR, this is the 18 one.  Which shows an owner that's had it since 2011 (good sign).  Account ending in 19 bought Feb.  Really surprised they're getting $850 for 533SF units (HCAD buildings size divided by 4) since that property -- to me -- is in BFE.  I don't want to be outside the 610 loop much less way outside the beltway.   It might be hard to manage unless YOU'RE local as finding a management company to take on a random 4 plex in BFE might be hard.   I wouldn't buy it unless I had some other properties / infrastructure in place.  

"Proof of Funds w/ Cash offer or PreApproval Letter from Lender based on satisfactory credit, Income & Assets) Contact Listing Agt for Appt. Supra installed shortly. Measurements are approx & should be verified. All information in listing should be verified by buyer prior to purchase.. One unit left to lease as Tenant just moved out. Will be 100% leased prior to closing with Gross Income of 3400/month. Expenses per owner are Maint 200/unit or 800 total. Taxes: 3091/yr or 258/month. Owner says Water averages approx 125/month."

Thank you all for your feedback.  It looks like since I posted this, someone made and offer and it is now under contract.

@Vijaianand Thirunageswaram Is it risky to not include cap ex? I feel like that's how you may find yourself under one day if something bad happens. I'll have to learn more about DSCR.

@Mark S. I'm being extra conservative being new.  And it's now under contract!

@Clayton Mobley I read that 8-10% is typical for property management but I also heard sometimes property managers sneak in fees.  I was being extra conservative.  The bigger pocket calculator gave me the ranges for repairs and cap ex.  I chose the higher end of the range but not the highest (15%).

@Ryan Goff and @Cody L. Your suggestions were very helpful.  It was actually what made me not consider this property anymore.  High crime rates with no one willing to go manage it means I have to put myself at risk to collect rent.  Not my cup of tea but it looks like someone is interested.  I hope they post on Bigger Pockets because I wonder what deal they got and how it goes. 

@Min Wang certainly some PM's may do that, but I assume you would do your due diligence to find a PM that is decent. I don't think any of reputable PMs folks use here on BP do that. Our PM arm charges 9% and a leasing fee of one month's rent (our average length of stay is 38 months, so you'd pay this about once every three years or so). There are no other fees, and certainly not any hidden ones. In a big market like Houston I'm sure you'd be able to find a PM that operates the same way. 

On our pro formas we use 9.4% as the PM fee to account for this little extra leasing cost and to be conservative. Once you find a PM you like (and go ahead and ask to see the contract you'd be signing before you pull the trigger) you can just do the math of their fees vs how often you'd pay them and tack that onto their annual fee to get a realistic idea of that expense.

I do agree with @Cody L. that it being 'newly renovated' and potentially having just been purchased in Feb (if it's that tax account ending in 19) would make me think you're on the other end of a flip. I know it's under contract with someone else now, but these are still useful things to learn to look for.

I know this post is a little outdated and the property has been sold, but I wanted to add.

I went to see a fourplex on that specific street a few years ago (I think it was for sale for around $120k-$150k), it seems like a VERY HIGH CRIME area. The moment I parked on the street everyone was looking at me giving that that vibe that they know I'm an "outsider". I went up to look at the property and one of the doors had gunshot holes in it.

After I finished inspecting the property I went back down to the street and was immediately approached by several people asking for money and cigarettes, there were plenty of females using Walmart carts as strollers for their babies, and finally when I went back into my car someone came up to me asking what I was doing there, I replied "I'm looking to buy a home here" to which he replied "Really?! Get out of here, you don't want to live here" (I removed all the NSFW words from his comment).

After that experience I decided that this street is not suitable for my investment goals. Not saying it can't be profitable, but I am almost 100% sure it will be a nightmare to maintain and/or collect rent. Also, I'm not trying to be judgmental or anything, that's just my observation.

Good luck!