Deal Or No Deal?

Question

The property is a four family with some updated electrical and plumbing.  The neighborhood is C rated area.  I  attempted to run a few quick numbers based off of statistical data and current rents. I would greatly appreciate your opinion.

Asking Price:     $52,000

Purchase Price:                  $41,000

Gross Monthly Rent:            $1800

Estimated Monthly NOI:            $720  ($1800 x 40%)

P&I:                                 -$220 (20yr term @ 5% with No down payment)

$100 Profit/unit:               -$400

______________________________________

Net Profit:                      +$100

Estimated Monthly Expenses:      $1080  ($1800 x 60%)

Insurance                             -$150

Sewer                                   -$60

Taxes                           -$50

Trash                                    -$60

Water                              -$50

Lawn/Snow Care                   -$50

Property Management           -$180   ($1800 x 10%)

Capital Improvements            -$180   ($1800 x 10%)

Repairs/Maintenance             -$270   ($1800 x 15%)

Vacancy                                - $216   ($1800 x 12%)

____________________________________________________

Net Profit                              -$186

I'm not quite sure if If my percentages of expenses (Repairs/Maintainance, Vacancy, Capital Improvements) are correct since I detailed the utilities.  With my current numbers, I'm not sure this property cash flows?

Jeffrey Charter · Answer

Asking Price: $52,000

Purchase Price: $41,000

Gross annual Rent: $21600

Insurance -$150

Sewer -$60

Taxes -$50

Trash -$60

Water -$50

Lawn/Snow Care -$50

Property Management -$180 ($1800 x 10%)

Capital Improvements -$180 ($1800 x 10%)

Repairs/Maintenance -$270 ($1800 x 15%)

Vacancy - $216 ($1800 x 12%)

Gross annual Expenses: $14592

NOI= $7008 ($1800 minus $1216)

Debt Service P&I: -$2640 annually (20yr term @ 5% with No down payment)

Cashflow= $4368 annual (NOI minus debt service)

Cap Rate= 17%

I agree with Bill about deferred maintenance.

Also

To many $4368 is a lot of cash, but you have to ask is it enough for my time and effort that I am going to put into this property. Some people say buy and hold is passive investing, it really isn't, and at that price point i'm sure you are going to run into a few unseen headaches.

Engelo Rumora · Answer

Although the numbers look great I wouldn't buy anything bigger than a 3 bed house in a C class area.

There will mostly like be drama on a regular basis with numerous vacancies.

Just my opinion.

Thanks

Will Barnard · Answer

Your expense ratio is well above 50%, that is above average and conservative. So using those numbers and still having cash flow would be a good thing. My concern would be any needed capital expenses/deferred maintenance needed as your price per door is very low.

From a cash flow only standpoint, looks like a good deal.

Jean Bolger · Answer

On the surface of it, I'd say getting four units that rent at $450 for under 11k each is bound to cash flow. But it really depends on the building and what kind of shape it's in. Also the neighborhood.

A low end deal like this could be a dream or a nightmare. It's not just the math that should be the driving force in your decision.

Bill Jacobsen · Answer

If my calculator is right you have estimated expenses at $1,266 or 70.33% of rent.  That leaves you with $534 per month of net operating income.  That is a cap rate of 15.6%.  That number is very good.

I calculate your P+I payment to be $270.58 at 5% on $41,000.  Subtracting that gives you $263.42 cash flow each month.

Some of your expense numbers look a little high to me but you know more about it than I do.  I would want to know whether there is deferred maintenance on the property since you are getting it at such a low price.

Good Luck.

Bill

Joseph Tarallo · Answer

Where are you finding 4 family houses for 50k lol ? I'm in Jersey they are going for 300k plus