Help Analyze My Deal

7 Replies

I'm about to sign a contract on a 4 family in upstate NY. The price is $170K and I'm using an FHA 203K with 3.5% down. Here is the math:

Rents $37,200.00
 
Mortgage $11,748.00
Vacancy $3,720.00
Insurance $1,500.00
Maintenance $2,976.00
Taxes $8,000.00
Management $3,720.00
Capex $3,720.00
Total Expenses $35,384.00
 
Income - Expenses $1,816.00
Monthly Cash Flow $151.33

Am I missing anything?  Other than the fact that the monthly cash flow isn't that great?  The current rents are under market by about $75-$100.  I think I can clean up the place and bring up the rents to market level which should bring up the cash flow.

Here's where I need a little more advice. The place needs about $20K in repairs and deferred maintenance. I have almost enough cash ( I might have another month or 2 of saving to get it all) to up the down payment to 20% and pay for the repairs out of pocket. I think I can save a little on the repairs so I would need about $50k to close and do the repairs if I go the traditional route vs $13k out of pocket to go the 203K route. The net effect by going the traditional route would be to save about $350 per month on the mortgage and PMI.

Is it better to have the increased cash flow or save my current cash for the next deal?

@Jeff Tracy

The numbers look good. I like that you included PM cost in the analysis but if you have the time to manage the property yourself you should, because then you can squeeze out a sizable cash flow and get valuable experience. 

As for your down payment dilemma, it really depends on the following:

1) Is it easy to find another property with the same cap rate?

If yes,

2) Can you deploy the 37k you have left to buy that property right way?

If no,

3)How long will it take you to replace the 13k that you spent to acquire the 1st one?

Keep in mind that with buying two you provide yourself with ability to earn more money by managing both yourself and diversifying your assets.

On the other hand I am not a fan of putting all the cash you have to buy one property so only do this if you have access to emergency funds. If you don't you should probably do FHA for 1st then keep cash reserves, save more, then buy a 2nd property.

@Jeff Tracy  If my math is correct, it looks like a cap rate of about 7%. It's not horrible, but not a great deal according to what experienced investors look for (10ish). You are also accounting for a 10% vacancy rate - have you looked at vacancy rates in your area and how that compares? I understand the need to be conservative too.

I would probably leverage my money and since it works with min. down, might as well go for it.

Originally posted by @Ahmad Hijazi :

@Jeff Tracy

The numbers look good. I like that you included PM cost in the analysis but if you have the time to manage the property yourself you should, because then you can squeeze out a sizable cash flow and get valuable experience. 

As for your down payment dilemma, it really depends on the following:

1) Is it easy to find another property with the same cap rate?

If yes,

2) Can you deploy the 37k you have left to buy that property right way?

If no,

3)How long will it take you to replace the 13k that you spent to acquire the 1st one?

Keep in mind that with buying two you provide yourself with ability to earn more money by managing both yourself and diversifying your assets.

On the other hand I am not a fan of putting all the cash you have to buy one property so only do this if you have access to emergency funds. If you don't you should probably do FHA for 1st then keep cash reserves, save more, then buy a 2nd property.

It would probably take me about 4-5 months to replace the $13k I'm investing on this property.  There is another property around the corner from this one that I've had my eye on for some time and even went back and forth a few times with offers.  I don't think the seller is quite ready to let it go for what I think a reasonable price is, but I think he's going to be foreclosed on soon so he might be more willing now.  I'd like to use the extra funds to buy this other property as well, but I'm concerned about having to little equity in 2 properties and getting in over my head.

Originally posted by @Corey Fick :

@Jeff Tracy If my math is correct, it looks like a cap rate of about 7%. It's not horrible, but not a great deal according to what experienced investors look for (10ish). You are also accounting for a 10% vacancy rate - have you looked at vacancy rates in your area and how that compares? I understand the need to be conservative too.

I would probably leverage my money and since it works with min. down, might as well go for it.

 Vacancy rates in the area are about 1/2, or 5%  As for the cap rate, if I bring up the rents to near market then the cap rate would be 9%.  Is it ok to look at it this way or am I trying to game the numbers a bit?

I left out the fact that I'm actually paying $160K for the property, but getting $10 from the seller for closing.  So, do I figure the cap rate using the $160K figure or the $170K that I'm borrowing?  

Originally posted by @Jeff Tracy :
Originally posted by @Ahmad Hijazi:

@Jeff Tracy

The numbers look good. I like that you included PM cost in the analysis but if you have the time to manage the property yourself you should, because then you can squeeze out a sizable cash flow and get valuable experience. 

As for your down payment dilemma, it really depends on the following:

1) Is it easy to find another property with the same cap rate?

If yes,

2) Can you deploy the 37k you have left to buy that property right way?

If no,

3)How long will it take you to replace the 13k that you spent to acquire the 1st one?

Keep in mind that with buying two you provide yourself with ability to earn more money by managing both yourself and diversifying your assets.

On the other hand I am not a fan of putting all the cash you have to buy one property so only do this if you have access to emergency funds. If you don't you should probably do FHA for 1st then keep cash reserves, save more, then buy a 2nd property.

It would probably take me about 4-5 months to replace the $13k I'm investing on this property.  There is another property around the corner from this one that I've had my eye on for some time and even went back and forth a few times with offers.  I don't think the seller is quite ready to let it go for what I think a reasonable price is, but I think he's going to be foreclosed on soon so he might be more willing now.  I'd like to use the extra funds to buy this other property as well, but I'm concerned about having to little equity in 2 properties and getting in over my head.

Then you should just put it all down on the 1st property. The difference in returns between 11.35% (350*12/37000) and lets say 15% if you put 20% down on a similar or better property is small and does not justify your money idling for 5 months. I suggest you buy the 1st one without PMI and manage it yourself which will let you cash flow well. You will be a in low risk position and you will build cash reserves quickly so you can save up to buy a 2nd property. And if you decide owning rentals is not for you, you are not stuck with PMI and wont have to lose money to refinance to get rid of it.

At the end of the day its not a cut and dry decision, many factors go into play but I would value peace of mind over the extra couple of bucks. 

@Jeff Tracy I would take a second look around.  Maybe just look a bit deeper or a little further down the road.  

IMHO the taxes kill that deal. No matter what you do that 8k is going to be your biggest expense. I'm looking at similar deals on 2 and 3 families with comparable numbers but the taxes are under 3k.

You said you hope to raise rents 75-100 per unit. Cleaning up usually means spending money and if you have to spend money to raise rents it will take a little time to replace that.  

If you think there is some appreciation in the deal that would change things a bit, but then again 4 plexs are usually pretty stable. 

The 10 percent vacancy is good on a 4MFR like this. I've had to deal with 4-5 month vacancies on my three family and with only two other units it really kills my year. Having 4 units your a bit better off.

I had a three year period when taxes went up every year for a three year jump of 40% and then my insurance company called to say my area had just been rated at a higher risk so my insurance went from 1600 to 2500.  In everything the unexpected can happen and if your only working with a best case of $300-550 you could get into a spot where your risking a big chunk of capital for a little return.  

There are always other deals.  Nothing is worse than sitting on real estate with low margins and coming across a deal you can't afford to move on quick because your weighed down.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.