Ok Guys - here it is, be honest. Im a little nervous becuase I think I found a good deal but at the same time I think it is too good to be true and I'm leaving something out.
Triplex House is listed at $640k (similar comps in the area have been selling for $550k or less so I might be able to get this down a good amount with my agent's help)
I am assuming a 30yr fixed at 5% with a 20% downpayment which brings Principal& Interest to $2748
Market rents are: 3bd-1800 2bd-1500 1bd-1100. This house one 3bd, one 2bd and one 1bd, so I can assume a market rent of $4400. (These numbers take into account the rents I would receive after bringing any inherited tenants up to market rent)
Taxes are $441
Insurance is $210
CapEx is calculated at 7% of monthly rents (is that a good number to use?) at $308
Vacancy (NYC) is 3% of gross monthly rents at $132
Maintenance is 3% gross monthly rents at $132
PITI comes to: $3397
Monthly Expenses added up equal $572
Total monthly expenses come to $3969.
If i take the monthly gross rents at $4400 - $3969 total monthly expenses, I am getting $431 in monthly cash flow.
Ill be honest, I am little concerned that I am leaving something out or not calculating something correctly. Can you guys take a look and let me know?
You are putting down a lot of money to get just $431 a month back. That's about 150 per door. Which is not that good. And your expenses vacancies assumed to be minimal.
@Brittney Lynn it is normal to be nervous, don't let analysis paralysis set in, but take a hard look at the numbers and the feedback I am sure you will get on the forum.
A few things I saw:
Vacancy at 3% might be right for NYC, but you need to make sure you have a good reserve fund counting on $1000+/mo rents in case it takes you two months to fill a vacancy if you end up evicting someone, or they leave mid-month and it takes a few weeks to turn the property.
Depending on the age of the property I would definitely increase the maintenance to ~7% at a minimum as things will come up and unless it has been recently rehabbed I would expect plumbing, etc issues to be common plus any costs to prep the property upon a turn(unless you are counting on CapEx for that).
The one thing I didn't see you mention was Property Management. Most investors even if they are self-managing at first usually include that as a 10% fee to ensure that if they ever didn't want to/couldn't manage the property they could pay someone to do it. This may be an acceptable risk if you are buying in an area that has historical appreciation both in property value and rents - as you could build in the 10% over time with appreciation in rents.
Hey, have you tried the bigger pockets rental property calculator? if not you should try it.
From what I can see there is not enough money per door per month for me to go after this deal unless I'm putting 5% or less of my own money into the deal.. I think your vacancy factor is far to low, I always do 8.33% no matter what. @Dave Savage had some great points on PM fee's
A quick top end look. $4400 in rent price 550K - not even close to a deal as far as I am concerned.
Count on your expenses being a 50% of income unless you are paying utilities then use 60%. Don't assume a penny less unless you have the prior owners tax returns and do full due diligence to verify income and expenses.
$4400 X50% =2200Mo - $2748 financing cost = $548 negative cash flow a month.
Your vacancy rate is low, you haven't included management, tenant placement costs, turnover costs, Accounting, licenses, common utilities. Landscaping and exteior maintenance.
- I thought that $100 per door per month was pretty good based on Brandon Turner's deal analysis videos. Does this still apply or is this maybe outdated? I was also looking into some first time homebuyer programs that allow me to put only 10% down (so 60k instead of 120k on a 600k property. The numbers are more in my favor with only 10% out of pocked + closing costs but do you think that this lower amount would be more attractive?
@Dave Savage – Reserves are definitely met. I have just over six months in savings that would pay for the mortgage costs and expenses. If all tenants left and I was stuck with the entire mortgage and expenses, my salary from my full time job would be able to cover
-I changed the maintenance percentage to 7% and ended up with cash flow of $254 per month.
-I will managing the building myself for sure because I will be living in the smallest of the three units. The area has seen increases in home prices and rents historically because of the ease of access to public transportation and highways, good schools, safety, relative low taxes and proximity to parks. I am also looking at this as my first step into real estate investing so I feel that the lessons I learn, and skills learned are vital for the next deal (which by the way will most likely be out of state due to crazy new York city prices – so definitely will be using a property manager)
@Tony Cavalli I tried using it but it wants me to sign up and become a paying member. I don’t think I am ready for that just yet.
I used the 50% rule at first and went deeper when it seemed to be one of the better deals in the area. I got the annual tax payments from the city tax website. Tenants will pay their own electricity and gas however based on the set-up of the house, the heat is typically paid by the landlord (me!). I would definitely ask the current landlord for income/expenses and schedule E if this deal makes sense to ask.
Something I didn’t mention before is that I would living in one of the three units (probably the smallest so I can get the most rent from tenants). The single most biggest factor of me finding a home in NYC is to move out of my moms house. If I was to buy a condo in a nice area the price would be at a minimum $550k so the main reason for me even getting involved in real estate is to ease the burden placed on ME when purchasing my first home. If I can find a house where I will pay less than I would if I was just buying a condo I would be happy so I may be looking at ‘this’ first investment as more of a personal home than an investment. Does that make sense??
Sorry for the long post guys, I just have so many factors going in to this and I want to make sure that I don’t screw up my first steps into home ownership. Thank you so much
i agree with Ned. i think this is just not a good deal. you living in it makes it even a worse deal.
@Brittney Lynn It's not a good deal. I know you want to leave your current living situation, but we want to make sure your first deal is a real winner so we can have you post your success story. :) Keep looking my friend!
I think some additional info might help @Brittney_Lynn a bit more than just saying this is not a good deal. ( although I appreciate any and all help as a newbie myself )
I think if you guys can say, well for me this isn't a good deal at this price, but if you can buy it for $$$, then it might make sense.
Maybe then expand a little and show why it might make sense at that lower price, and maybe she can then re-think it, or try to negotiate some more.?
Or maybe even give an example of how much per door you would need as a minimum to consider a deal. Also keep in mind, this is not only an investment property for her, but that she will also be living there contributing to the monthly payments.
@David Grantz Quick answer about $220K. That is only 1/3 the asking price.
Figuring expenses at 50% that makes is about a 10 cap rate. I can do much better than that in my market so why would I pay more.
@Brittney Lynn You mentioned bringing rents up to market. Keep in mind you have to honor existing leases. It may be a while before you can get the property up to market levels. Use this as a negotiating too.
You should buy based on today's income. If the property has potential for higher income and the owner wants the higher price, tell him you'll pay more after he gets the income up. If you do the work to get the income up you deserve the reward.
@Ned Carey undefined That is a really really good point! Today I am just looking at properties online. Once I start working with an agent (in about 2 weeks) I can have a better understanding of true income and true expense for each building.
Another question. How big of a change would the role of financing play in this? I ask because I am currently getting pre-approved by a few lenders and the initial rates/monthly payments they quoted seem to all differ. If I go with one lender over another, I may end up saving ~$250-350 per month.
@Brittney Lynn Financing makes a major difference. $205 a month is an extra $3000 a year. That is a major swing. That can be the entire net profit on a SFH.
You are new and often new investors don't know how cheaply they should buy or can buy. There are a lot of hidden costs in real estate. Closing costs for example are something many new people don't think about in their calculations. If you are flipping you have two sets of closing costs. That can eat up a lot of profit.
I am curious why you thinking this might be too good to be true when you said that it is listed $90K more than similar comps. My guess is becuase you have underestimated expenses.
My partner and I bought a house last year and within the first two moths we had to dig a new drain line to the curb and put on a new roof. We weren't counting on that. Fortunately we had the reserves to do it but it is just an example of how expenses often wind up more than we plan for.
The fact this may not be a good deal, makes it a great learning tool. You can negotiate ruthlessly and fearlessly, becuase if you anger the owner you lost nothing. It wasn't a deal to start. Good luck - Ned
Just my quick opinion, this seems like an awful lot of money to invest in your first property. It doesn't seem like there is enough juice in the deal to make it worthwhile.
Going In you always want to be conservative in your income estimates
and very liberal in anticipated expenses! You can also apply
several quick tests 50% test, CASH on CASH %return,etc. . Biggest
factor to keep in mind is you will be adding YOUR Debt Service expense
to operating costs not what the current owner lists against current rents
for a rough NET. If things don't easily work in the positive that makes
sense- Move On! Never " make it work" at this point!
Ps. Heat and Water Expenses can be killers You must be absolutely
certain about these!. You need Water Bills for Water, Gas,Supplier Contacts.Acct#s,Oil Supplier Contact and last two years billing.
The whole 9. Any offers always contingent on your review and approval of
your findings. Best For Success!
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