Is this a good deal?

Question

This 4-unit property (2 beds/1200 sq.ft. per unit) is listed in the low $800's. It currently brings in $4600 in rents. The area has about a 3% vacancy rate, is within a few miles of a major university, and is generally in a location that is up and coming. 
	
	It has annual expenses of about $27K - which seems a little high. 
	
	I think the rents are a little low for the area and could be increased, especially if some minor updates were made to each of the units.

Any thoughts on if this is a good deal?

Joshua McGinnis · Answer

Thanks to everyone for their thoughts and feedback. Much appreciated.

John Horner · Answer

@Justin B. , sorry I didn't go into detail.  We aren't investing the war zones. I am talking B to C neighborhoods, working class.

We find deals weekly with much higher returns, but we choose not to invest in those areas.

Hope this helps!

Justin B. · Answer

Which is only a 10% return if you put in all cash.  Thats a low return for Columbus....

John Horner · Answer

In Columbus, Ohio $800k would buy you 20 SFH, 3bed/1bath renting at about $800/month each.

Bringing in $16,000 in monthly rents.

Aaron Montague · Answer

@Joshua McGinnis I don't like this deal because I'm guessing someone is going to pay close (within 50k) of asking.  At 609k, I get about $575/month cash flow and 4.4% ROI.

If the rents were $1500/apartment/month, this is a solid deal at 609k.  At 809k you lose in every way.

Honestly, I'd go at this deal with an FHA, 5% down loan.  You'd be into the place for about the same as the current tenants (~1150/month).  IF you can get the other tenants to $1500/month, you'd only be out about $160/month personally.  If you move out after 12 months, the seasoning period for most FHA loans, you could rent that last one for $1500 and be making decent money.  I see you clearing $1050/month if all 4 places are rented at $1500/month.

If you self manage during year 1, you'll only be out about $760/month personally.  I always recommend this simply for the experience.

Here are my expenses for year 1:

Mortgage Rate 5.00%

Length of Mortgage in years 30

Monthly Mortgage payment $3,105.78

Taxes $416.67

Sewer and Water $-

Trash $-

Heat/Utilities $-

HOA $-

Cap Ex and Ops $200.00

Insurance $266.67

Mgmt Fee $-

Vacancy $207.00

Total Expenses $4,196.11

Years 2+:

Mortgage Rate 5.00%

Length of Mortgage in years 30

Monthly Mortgage payment $3,105.78

Taxes $416.67

Sewer and Water $-

Trash $-

Heat/Utilities $-

HOA $-

Cap Ex and Ops $200.00

Insurance $266.67

Mgmt Fee $600.00

Vacancy $360.00

Total Expenses $4,949.11

Jeff Rabinowitz · Answer

I would not invest in this deal.  If you run into an extended vacancy or only a few unexpected expenses this could turn out to be break even at best--at worst it is an alligator.  (It could eat you if you don't feed it cash every month).

Joshua McGinnis · Answer

@Aaron Montague

Taxes are about $5K a year. There's no HOA and currently, the tenants are paying for their own utilities (Water, Sewer, Trash, Electric), which may be why the rents are on the low side for the area.

Aaron Montague · Answer

This isn't going to be a good deal without taking some serious dollars out of the price.

Your mortgage payment on 809k @ 4.75 with 25% down will be $3,165.10.  This leaves $1450 for EVERYTHING else.

How much do you pay for the following?

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops

Insurance