Analysis

[Bridget Smith-Osbourne]

Hello BP Family,

This is the deal I am currently looking at. The seller is offerring owner financing. It has been on market since last year. Ask price is $189,900. Two brick buildings consisting of six - 1 bds & one 2 bds. New roofs w/i two years. All units occupied except two. Units in pretty decent shape. HVACs working but old. Property also has spacious 2 car garage that could possibily bring in additional income. As per seller gross potential rent 3,150. I would put it at $400/month to be on conservative side, $2,800. Tenant paid utilities. Yayee!! Taxes 3,609.88/year. Insurance $4000/year. I was wondering what would be a good offering price? I know there are other expenses such as pest control, yard maintenace, etc that I have not mention. Just looking for some guidance. Any input is truely appreciated.

[Chris Mukhar]

Hi Bridget,

I always look at investments from a rate of return perspective. You can get 7% cumulative gross average in a stock market index fund so real estate has to AT LEAST double that for me to be interested. In reality, i'm looking for a 20% return on cash. You may have different criteria for what would make you interested.

From your post I am gleaning that the property would be producing $400/per month in cash flow or $4,800/year.

Assuming you put down 20% of $190,000 = $38,000, you are looking at a return of invested capital of $4,800/$38,000 or 12.63%. This does not include closing costs which would increase your cash outlay and thus reduce your cash return.

I'd shoot for at least 20% cash return personally. What i would pay would look something like this:

$4,800 / [(Down Payment % * Asking Price) + Closing Costs) = 20%

Assuming 20% down payment I would want to pay < $120,000. I would also definitely recommend factoring in closing costs.

Of course, a 12% cash return is better than you could get in the stock market, but considering the added risks of real estate, it wouldn't be enough for me personally to do the deal.

I hope this helps you think it through,

Chris