Deal or No Deal???

9 Replies

Hello BP Community;

I have these two opportunities to purchase 2 properties.

They are student houses, both in excellent condition, no rehabing is required! Both have been placed through the BP Analizyer / calculator, over and over.

I would love to hear from anyone with expereince with this typoe of puyrchase. Your feedback would be greatly appreciated, that includes you Brandon Turner!

Property #1 is a 2 family 4br & 5 br; 2 newly remodeled kitchens, 3 bathrooms, new appliances. Asking price is $228,000.00

Figures: 3200 sq ft

Gross Rents:($1840 + $2250) / 4050/mo ($48,600/yr)                                                           

Expenses: Taxes actual 3920                                                                                            

Insurance: $100/mo;  Water/sewer $85/mo;  Maintenance (5%) $202/mo;                       Misc. (2%) $81/mo TOTAL MONTHLY EXPENSES $1,001/mo ($12,012/yr)

NOI $3,049/mo / ($36,588/yr)

Debt Service ($182,400 @ 4.25% - 30 yrs) = $897/mo ($10,764/yr)

Net Income: $2,152/mo ($25,824/yr)

Cash Invested: $45,600 down + $5,000 Closing costs - $8,100 security deposits = $42,500

Cash on Cash Return: $25,824 net income / $42,500 cash invested = 61%

Gross Rent Multipler ($228,00/$48,600) = 4.7

Cap rate ($36,588 NOI / $228,000) = 16.0

DEAL OR NO DEAL?

Property # 2 is a 2 family 4br & 4 br; 2 newly remodeled kitchens, 2 bathrooms, new appliances. Asking price is $220,000.00

Figures: 2500 sq ft

Gross Rents:($1840 + $1840) / 3680/mo ($44,160/yr)

Expenses: Taxes actual $4360.00

Insurance: $100/mo; Water/sewer $75/mo; Maintenance (5%) $184/mo; Misc. (2%) $74/mo TOTAL MONTHLY EXPENSES  $950/mo ($11,400/yr)

NOI $2,730/mo / ($32,760/yr)

Debt Service ($176,000 @ 4.25% - 30 yrs) = $866/mo ($10,392/yr)

Net Income: $1,864/mo ($22,368/yr)

Cash Invested: $44,000 down + $5,000 Closing costs - $7,200 security deposits = $41,800

Cash on Cash Return: $22,368 net income / $41,800 cash invested = 54%

Gross Rent Multipler ($220,00/$44,160) = 5.0

Cap rate ($32,760 NOI / $220,000) = 14.9

DEAL OR NO DEAL?

@Vince Futia , have you allowed for VACANCY cost? Property Management cost? Comparable sales in the area (consider Offering less)? All the best...

The numbers for property #1 look better.  However I would take a second look and see if there is a reason that property #2 has a higher property tax.  If property #2 is in a better location, has more parking or other factors, that could easily outweigh the extra bedroom and bathroom in property #1.

They both look good at a glance, however your treatment of the security deposits has me concerned.  The deposits will transfer to you, but that's not your money and must be held separately.  When we close, we have always placed  the amount of the security deposits  from our own funds into the security deposit account we have.  You should check to see what local laws state, some have stricter regulations.  

You will receive the prorated rents for the month you close- for example you close halfway through the month, the seller must transfer half that month's rent to you, and that would come out of your closing costs.

Kelly

no to both. #1 has a little over $100/M in NC per door, and #2 even worse than that.

I agree with Kelly re security deposits.  Also I don't see any electric/gas costs, just water and maintenance.  Are your tenants paying that?  Are you allowing for vacancy utilities?

Thank you everyone!

Great feedback

These two buildings are right next door to each other, right in the student area.

Both are in very, very good condition.

Both have been rented continually by the same sorority for the last 12 years fully occupied. Could that change?? Yes, of course. But that's why I  might have had 0 for occupancy

The students pay utilities.

I understand about the S. deposits, I can go back to the owner and ask his thought process in number process.

Thanks again!

@Vince Futia I think you have to budget 14% for maintenance for student rentals and also budget 10% for vacancy.  Another concern is the Albany grouper law that forbids housing more than three unrelated tenants. You might want to look into that, it might not be an issue since sororities are currently renting the units but what if they move out. If you cannot put 4 and 5 students in the units your rents will be a lot lower.

What is the Grouper Law? In the City of Albany there exists a zoning ordinance which has come to be known as the so-called “Grouper Law.” This ordinance only permits four or more persons to live in any dwelling unit if they are members of a traditional family or the functional equivalent of a traditional family. Specifically this ordinance states (Family Definition; section 375-7 zoning ordinance):
FAMILY
1. Shall mean

1. one, two, or three persons occupying a dwelling unit or
2. four or more persons occupying a dwelling unit and living as a traditional family or the functional equivalent of a traditional family

2. It shall be presumptive evidence that four or more unrelated persons living in a single dwelling unit do not constitute the functional equivalent of a traditional "family"

Therefore, three unrelated persons occupying a dwelling unit is the maximum allowed by this ordinance.

Sorry, but if you understand about the security deposits, what is there to ask the current owner about?  It isn't his money, it won't be your money, it just needs to be transferred to you in order for you to be able to give the money back to the tenants after deducting for repairs when they vacate.  You need to recalculate your cash on cash return taking the security deposits out of the equation.  

You will also need to check with the city as Ahmad said.  Where we are, you need different zoning on order to rent one apartment to more than 3 unrelated adults.  I asked about the frat houses around the corner and was told they had a different zoning.  

As far as vacancy goes, yes, the sorority has been renting it, I assume they have girls moving in and out at different times and the units have never been empty.  But what happens if something happens to the sorority?  Perhaps there is a plan to buy a house to rent to the sorority and then you'd be left with vacancies.

Is this typical for prices, rents, and returns in this area?  Do you have actual quotes on the insurance?  It is my nature to be suspicious of especially good (looking) deals, I assume that I am missing something.

Kelly

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