Realized I originally posted this in the wrong forum. Duplicating here.
After about a year of studying, reading books, and lurking the biggerpockets forums, I'm about to put an offer in on my first investment property. It consists of two duplexes on adjoining lots, sold together at a single price. My understanding is that the owners are wanting to downsize their portfolio as they are nearing retirement.
The buildings are all brick, constructed in 1972. Specific information from the seller is as follows:
All units are said to be under new 1 year contracts.
Unit 1: 2+1 @ $500/moo
Unit 2: 2+1 @ $500/mo
Unit 3: 1+1 @ $450/mo
Unit 4: 1+1 @ $385/mo (I am told this is a long-term tenant)
2014 property taxes: $1,260/yr = $105/mo
Insurance: $1200/yr = $100/mo
Owner pays water: (1 unit has separate meter and pays the water): $225/mo combined
Owner pays trash: $100/mo combined
Asking Price: $99,995
Maximum offer based off reverse 2% rule: $91,750
Mortgage(20% down @ 4.25% for 20 years): $454.52/mo
Monthly Cashflow using 50% Rule: ($1,835/2)-$454.52 = $462.98/mo
My assumptions: 12% PM, 10% Vac, 10% CapEx, 5% M&R = $678.95
Total operating expenses: $678.95 + $105 + $100 + $225 + $100 = $1208.95
Monthly Cashflow from my numbers: $1,835 - $1208.95 - $462.98 = $171.53
Assuming $2500 to close and $18,350 as down payment, looking at $20,851 out of pocket.
Cash on Cash Return: ($171.53*12)/$20,851 = 9.87%
From what I've read, I might be on the conservative side with some of my assumptions. Using my numbers brings me well below $100/door/mo on paper, but I will be saving the management costs since I'll take care of it myself. I wanted to make sure it was still cash flow positive though, so I tried to include everything I could think of.
With that being said, I want to be sure I'm not missing something. If someone would care to dive into my analysis it would be greatly appreciated. This community has already been an invaluable resource for my learning so far.
Also, any suggestions on making an offer? A quick drive by of the property showed at least one of the buildings could use a new roof and some minor gutter work is in order. Do I factor that into my initial offer or just make sure their is an inspection contingency that would allow me to amend the offer once it's looked at by a professional?
Thank you for taking the time to read through this. My apologies for the length.
Originally posted by @O'brian R.:
Looks like you're including everything I can think of and holding some good conservative estimates as well. Though I'm curious as to how the rents compare with the current market in your area for similar size and condition. With a 1 year lock on tenants, not much you can do now if they're paying below market rent, especially true for that long term tenant. Inheriting existing tenants sounds nice in that you get instant cash flow, but the down side is that you didn't screen them so who knows who the owner placed in there to claim 100% occupancy. In any case, I'd request copies of the current leases to review. While you can't run a credit report without the tenants' permission, the current lease agreement should provide some good info.
Maybe you already did this, but be sure to get at least 2 years of P&L statements from the owner to verify water bills, trash bills, repairs, vacancies, etc.
Regarding potential improvements you'd have to make to the property...absolutely, I'd factor that into my offer. It will add to your cash outlay and affect your CoC return so definitely factor that in.
Thank you for the input.
The rents are actually on the high side for our town but this property is located right off the main road, in walking distance to the local school and a few businesses. This is a small town (population approximately 1500) but it's only about 7 miles from some of the job hubs in the surrounding area.
The Realtor said they are working to provide 3 years P/L but that they were having a hard time since they had multiple properties and let everything run together. That is a definite concern of mine, not being able to actually verify their expenses and that they're actually collecting rent every month; I assumed property owners kept better track of their finances.
Regarding the needed improvements, my father in law owns a roofing business and has done some construction as well. He obviously couldn't climb up on the roof, but he did the arms-length visual inspection and pointed out the repairs he recommended (one roof had architectural and was in decent shape but the other was just 3-tab and needed replaced. I was wondering, though, if that was sufficient for lowering my offer or if I had to have it "officially" inspected before adjusting my numbers. Does having my father in law involved cause a conflict of interest?
Also, I could use some guidance on taking over a property with existing tenants.
Sorry for all the questions; I really appreciate the help.
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