First time investor presented with opportunity of 5 rentals w/ cash flow

11 Replies

All:

I am new to real estate investing.  I am an attorney by trade (and will be begin an MBA in the spring).  Through my connections, I have been presented with an opportunity, and I would like anyone's input.

Here are the basic numbers:

Subject properties: 5 rental properties 1) 2/1 with flooring, paint, and bath updated ($500/mo), (2) 3/1 completely renovated $650/mo, (3) 1/1 completed renovated ($350/mo), (4) 2/1 fenced-in backyard and garage ($650/mo), (5) 2/1 $650/mo

Asking Price: $189,000

Gross Rent: $2,800/ month

Operating Expenses: (1) Taxes $133/mo (2) Insurance- $133/mo, (3) Mortgage (maybe $800/mo), (4) property manager $280/mo

Total Operating Income: $1,346/mo

Although the rental income does not satisfy the 2% rule, it seems, based on the numbers, that the rentals would cash flow?

My questions:

1) Should I consider it?

2) If so, how do I know how much to keep in reserves in the event of an issue? I understand there is a 50% rule, but does this include taxes, insurance, mortgage, etc?  I am thinking 25% of my total rent.

Thanks for your help!

Your taxes and insurance seem low. Are those your actual numbers or estimates? If they aren't the actual numbers you should check those to make sure the cash flow is as good as you think. Also, are they vacant or rented? If rented I would want to go through a copy of the lease and see if they are locked in for a month a year or what? When you go through the properties you should get an idea of what you will need to fix right away; what you will need to fix when the tenant moves out; and what you may have to fix in a year or two. That will help you determine how much you need to have in reserve. If everything looks decent I would say keep at least $5,000 available for when one moves out or you have to put a roof on or some other large expense.

Doesn't meet my rule:"Must return ALL of my investment within 5 years." $16,152/year doesn't even pay out in ten years. (Not everyone follows my rule. LOL).

As a beginning investor, start small. If you make a mistake, it will be a small one.

Good luck!

Originally posted by @Joseph Ball :

Doesn't meet my rule:"Must return ALL of my investment within 5 years." $16,152/year doesn't even pay out in ten years. (Not everyone follows my rule. LOL).

As a beginning investor, start small. If you make a mistake, it will be a small one.

Good luck!

 Doesn't meet my rule either.  All of my money back in 1 year.  Also, I don't like to see the words (3) Mortgage (maybe $800/mo),".  Either it is, or it isn't.  Someone stated the taxes looked low.  They don't to me, but the basis of that question (was it an estimate or the actual taxes) is valid.

When you know the actual numbers, and you analyze based on them, you don't need to use any arbitrary 2%, 50%, etc...rules.

Shaun,

I'll answer your second question first: The 50% rule typically includes taxes, insurance, property manager, maintenance, and vacancy loss. Your mortgage/financing is a whole separate consideration.

Back to your properties, it sounds like they are older and would likely need a little more maintenance than your average home (appliances, plumbing, electrical, etc). I would recommend saving no less than 15% monthly for maintenance expense. I would also recommend you speak with a PM in your area regarding vacancy expectations and typical lease up fees. In Texas it is usually between 50%-100% of one month's rent for a placement/lease up fee (in addition to whatever time you actually lost on those units). I would say typical vacancy loss expectations would be about 9% monthly. 

So to rework your numbers: 

Gross Rent: $2,800

Expenses ($1,218 - 43.5%): Taxes- $133, Insurance- $133, PM- $280, Maintenance- $420, Vacancy- $252

Net Operating Income- $1,582

Mortgage- $800 (probably)

Monthly Cash Flow- $782

I hope those numbers helped clear up some of your questions. How do you feel about the condition of the properties and the quality of the rehab? Also, how is the location of the properties (B/C area?) or are you dealing with an area where you need a police escort?

Good luck.

I appreciate the feedback!

The numbers were provided by the current owners.  The mortgage is $780/month.  Obviously, I will require these numbers to be provided if I proceed.

Also, all are currently occupied with tenants who have signed a one-year lease (normal).

This deal concerns me a little. If the numbers you've listed are correct, you don't have a lot of wiggle room for maintenance and repairs.  For example, who will mow the lawns and clear snow?  Also, what are the furnaces and water heaters like?

Lastly, I find it hard to believe that you'll be able to secure $190,000 mortgage and only pay $800 a month.  Could you elaborate?

Thank you.  I'd be happy to provide more detail.

1) The properties are located in a decent area.  The current owner is getting older and just wants out.  They were all remodeled a few years ago.  My contractor and I are going on site in a couple of days.

2) The mortgage will comprise of a promissory note with a five-year balloon at 4.75% on only about $151,200 (20K down).  I will put 20K down on the $189,000. 

3) All other expenses are covered by the tenants (lawn, utilities, etc.).

Joe Villeneuve! I like your rule better than my rule! LOL!

Originally posted by @Joseph Ball :

Joe Villeneuve! I like your rule better than my rule! LOL!

 They're both good rules...and neither are arbitrary.  LOL

Given how F'd up the stock market has been lately, I prefer to always have all my cash back out.  So, I vote for Joe's rule.  Even better, all cash back out in 2 months, right Joe? :D

This isn't a horrible deal, but I wouldn't suggest it as your first investment. Inexpensive properties like this (especially older ones) can have super high expense ratios - though to your credit you have a big number plugged in there.

I also worry about your first bite being a bite of 5.

At the same time, this may be a decent option.  It's just more risky than I would suggest starting with.

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