HELP I think I have a great deal.....but do I and am I ready?

Question

Rural Area outside of Atlanta, GA

I have been listening to bigger pockets, reading as much as I can on the internet, and watched HGTV in preperation for the big day when I find a real estate deal......Well, I think that deal just fell into my lap and all of a sudden I seem to have forgotten everything I thought I was soaking up.

The Deal - My wife told me last night a friend of hers who is a real estate agent told her about two buildings for sale that had 3 condos in each.  She said each building could be purchased for $200K and each unit inside the bldg would rent for $600/mnth.

I did a drive-by and looked up the property on the public County Tax website and it appears each bldg has 4 units in each; NOT 3.

1. Is this a good deal?2. What questions should I ask about the property?3. Any other advice?

Jon Holdman · Answer

Trust nothing the agents involved and the seller tells you.  Verify everything independently.

Jon Holdman · Answer

$200K for $1800 in rent is not a good deal as far as cash flow.  If there are really four legal units, it might be OK.

Watching HGTV is NOT a good way to get educated about TV any more than watching Star Wars is a good way to get educated about science.

Here's my quick and dirty analysis assuming four units per building:

Property

price: $200,000

rehab: $0

rent/unit, monthly: $600

units: 4

price/unit: $50,000

gross rent, monthly: $2,400

gross rent, annual: $28,800

cap rate: 7.2%

Financing

down%: 20%

rate: 4.500%

amortization, years: 30

down: $40,000

loan: $160,000

pmt, monthly: $810.70

pmt, annual: $9,728.36

total cash investment: $40,000.00

Analysis with property management

exp ratio : 50%

NOI, month: $1,200

cash flow, month: $389.30

noi annual: $14,400

CF annual: $4,671.64

COC: 11.7%

Analysis with self management

exp ratio : 36%

NOI, month: $1,536

cash flow, month: $725.30

noi annual: $18,432

CF annual: $8,703.64

COC: 21.8%

Garett H. · Answer

As a rule of thumb a lot of investors use the “1% rule”

Basically you take your purchase (plus rehab) price - so in your case $200,000 and multiply it by 1% to get $2,000. If your monthly gross rent is greater than $2000 it is something to look deeper into. If not, it’s usually a pass. In this case you’re at 0.9% so it’s probably safe to assume there are better deals out there.

Shane Stevens · Answer

I want to thank everyone for all the advice and words of encouragement.  I met with the RE Agent at the property yesterday.  It turns out there is currently 1 owner that owns six (6) quad units.   He is selling each quad unit to whoever will buy.  He has already sold two to two separate people. They are also wanting to set up an HOA.  I have decided there are just twos my irons in the fire on this deal for it to be a first deal for me.   So I  out on this one.  On to other opportunities.

The agent told me of a couple of other opportunities she knows about, two of which may be a possibility.

Thanks again all!

Mark Beno · Answer

@Shane Stevens

Thanks for the great post, Shane. As you're seeing from the comments, though, be careful esp. since this is your first deal. It's important to take action, but don't let one deal put you under. Good luck, my friend, and I look forward to hearing how it turns out for you.

Shane Stevens · Answer

Thomas,

The $600 per month was from the real estate agent.  I have to admit the thought has already crossed my mind as to whether the rent could be increased.  I was actually thinking potentially $750 per month.  I am going to investigate other properties in the area and see what I find as far as what other rentals are getting per month.

I happen to know one person that has about a 1400 sf single residence and is renting it for $900 per month.  Not sure how much value there is in that comparison, but it's all i have at the moment.  Thanks for the input.

Joseph Ball · Answer

This is not something to START with. You need more water through the gills before you take on something like this, in my opinion.

Thomas Williamson · Answer

My first reaction was only 600.00 per month for 200,000?  If the rents are only 600.00 a month, that should tell you all you need to know.  I have a quad 25 miles east of Atlanta.  I purchased for 154,000 (asking was 114,000) foreclosure, and all units rent for 750.00 each. I have a low mortgage on the building, so it's a cash cow.  Mine is in a really great area with good schools and great neighborhoods all around it.  All I could get the rents up to was 750.00 per unit after massive re-hab.  So if the rents are maxed at 600.00 I wouldn't touch that.  Usually when I see a nice house with unusually low rent (which is common around Atlanta) that tells me the surrounding areas may not be the best.  Food for thought.

Shean Rhoden · Answer

Wow! Thanks Shane for the great post and everyone that provided constructive feedback! It's not my deal but the thought process the other investors provide taught me something...

Shane Stevens · Answer

Garrett,

So your numbers are based on 3 units per bldg......but if there are 4 units per bldg x $600/mnth, then I am at $2,400/mnth.  The 4 units is what got me excited.

HELP I think I have a great deal.....but do I and am I ready?

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