Massachusetts Deal Analysis

[Andrew Auger]

Hello Everyone,

I was hoping you all could take a look at this deal that I am looking at for a second time. We are not under contract and I want to make sure my math and my estimates make sense so I can go in with a strong position as what to offer. 

I put the details in the google doc as its easier to display than in the posting section.

https://docs.google.com/spreadsheets/d/1Gi7HweJKvb...

Additional Non numbers information

• This would be my first property
• Yes there are cheaper places
• No I can't buy those as they are too far from my and my fiances places of employment (this one is already on the edge)
• Owner Revenue is us paying ourselves our current rent
• Would consider this a B property in C neighborhood 
• Each unit has central air, W/D, & Dishwasher, all of which are considered luxury items in an apartment. Means premium rents for the unit sizes.

Facts & Assumptions

• Owner did major renovation approximately 5-8 years ago including roof, heating systems, water tanks, windows, and central air. 
• 1BR units Heat is not separate, but has new energy efficient gas heater.
• No Comps are available
• In my opinion it is priced too high as if it was priced correctly, it would have sold, will attempt to push price down as I doubt it will appraise
• I believe the maintenance amount provided is artificially high due to inclement winter weather, we had record snow this year. Being a owner occupant means that I would do my own snow removal vs paying for it.
• House is over 100 years old
• First house I have found to cash flow in my search radius
• Using FHA or Mass Housing (similar to FHA) loan with a 3.5% or 5% cash down
• Have cash reserves above and beyond down payment

What do you guys think? Would you do this deal? Am I forgetting anything major in my cash flow calculations? My biggest concern with this property is that I don't believe the seller will budge on the price, which means it won't appraise, which means I don't qualify for the loan.

Thanks in advance!

Andrew

[Rob Beland]

@Andrew Auger definitely a tight deal but not terrible for an owner occupied property. Keep in mind that your owner's unit rent is fine for your cash flow analysis but you can't use it for tax purposes (you can't pay yourself rent). You also can only deduct 75% of all building wide expenses and you can't deduct any related to your unit. You can deduct mortgage interest and property taxes fully as they are deductible on your personal taxes as well as schedule E. 

Also if the one tenant is moving out prior to close you should plan to have six months of rent in reserves while you find a new tenant. It looks to me like you are negative cash flow from day one which is not good. 

As far as your analysis, reformat the document. At the top list all the rents then total it. You may someday add in coin laundry income or if you rent out garage spaces that would be rent that makes up gross rent.

Take your mortgage payment out of the calculation. That's not an operating expense. Use 8% for vacancy, 5% for maintenance, and you can start with 5% for management but in reality you won't get somebody to manage a four family for 5%. Closer to 10% is likely. A bank is going to want to see the management expense in there since you have no experience managing rental properties.

After you total your income and subtract your operating expenses you get your net operating income.

You can then deduct your principal/interest payment from your NOI and that is your cash flow.

Also, regarding the water/sewer, you can get that info from the city/town. Ask for a three year history. 

You should contact an insurance agent with some details on the property. If the seller owns several properties he may pay less for insurance then you might as a new investor. Being owner occupied may have an effect as well. 

Taxes you should verify from the city/town as well. Ask for a copy of their 2014 and 2013 Schedule E for the property. 

Also, make sure any work that was done was permitted. 

Just some things to consider without forming an opinion on whether or not it's a good deal. That's very relative.