First rental investment... does this look like something I should move forward on?

15 Replies

I am in the inspection phase of a duplex purchase in Boca Raton, Fl. I have been doing a lot of research and I am starting to think I should leave this deal. I would appreciate any feedback that anyone may have. Here are the details: 

There are 2 units each with 1 year leases that supposedly expire in Jan 2016. The rents that are being paid are slightly below market but I am ok with that part. The leases have dates erased and filled in and the last page of each is signed but not dated by the renters. I briefly met each renter and the vibe is ok but I am asking my realtor to get payment receipts and a statement from each renter acknowledging deposits applied, agreed upon rent, lease dates, etc.

The roof needs to be replaced which I knew going in. Initial investment is: $347,500. Current rents: $2450 which I would plan to raise to at least $2900 ($1400 and $1500 for second unit which has some upgrades.) From what I can gather the property is worth $380,000??

The inspection revealed the following other issues of concern: all appliances in both units should be replaced (not immediately or urgently). One air-conditioning units needs replaced. Federal Pacific electric panels need replaced. There are several other issues that exist but that I consider minor in nature.

I do plan on asking for the seller to deal with the electrical panels and I am going to ask for a credit for the roof and air... not sure on amounts yet, etc.

This is a cash deal so I have no mortgage or interest payments. I am still wondering if the return is worth it.

Any and all observations/ advice would be greatly appreciated.

Susan

@Susan Perry

My initial response is...that's a lot of liquid capital to be tying up for what will be a negative ROI (-0.89986 or -89.99%).

If we assume some very modest reserves (5% Vacancy, 3% OpEx, 3% CapEx) and that you will do the management yourself, that leaves you with $2581/mo, which doesn't include property taxes and insurance or anything other monthly costs you will pay. (We're just doing simple math here, so we'll use that number and not worry about the other expenses for a minute.)

That equates to an annual net cash flow of $30,972 on a cash investment of $347,500 (Again, simple math, so I'm leaving out the seller concessions.) That's a Cash on Cash return of only 8.9%.

For me, I would think there are a lot of other ways to leverage that cash that will perform better.  Why not finance at least 50% of the property, which would still leave you with strong cash flow, but then you could turn around and repeat the process on another property.

First of all, odd; there are no pending/contingent duplexes in that area in the MLS. $380k value, not likely. last 12 month sales; 205k 206 237 308 320 341 and 360k. Of course a couple were actually on Dixie, and property conditions of these sales will vary, but it doesn't appear yours is perfect either.

@Hattie Dizmond

  9% for what is probably an A class is a pretty nice return from my point of view.

her alternatives could be to simply lend money with a quality local HML and make 10 to 12% per annum

Originally posted by @Hattie Dizmond :

@Susan Perry

My initial response is...that's a lot of liquid capital to be tying up for what will be a negative ROI (-0.89986 or -89.99%).

If we assume some very modest reserves (5% Vacancy, 3% OpEx, 3% CapEx) and that you will do the management yourself, that leaves you with $2581/mo, which doesn't include property taxes and insurance or anything other monthly costs you will pay. (We're just doing simple math here, so we'll use that number and not worry about the other expenses for a minute.)

That equates to an annual net cash flow of $30,972 on a cash investment of $347,500 (Again, simple math, so I'm leaving out the seller concessions.) That's a Cash on Cash return of only 8.9%.

For me, I would think there are a lot of other ways to leverage that cash that will perform better.  Why not finance at least 50% of the property, which would still leave you with strong cash flow, but then you could turn around and repeat the process on another property.

 @Hattie Dizmond

Thank-you first of all for taking the time to analyze all that! Again, I am very, very new to all this. My thinking was that I could go in with a strong cash offer and get the best deal. However, your advice is something I have run into on BP and that is not to use my own money when possible. It is a different way of thinking for me. I have a lot of discomfort with the idea of "debt" but I am trying to learn to think differently. I have also read about considering a 50% expense on the cash returns... which makes this deal look even worse considering that it is not risk free, etc.

I may ask for full credit on the roof and air conditioning which will swing the deal by about $15,000. I am sure the seller will reject that.. he seems relatively reluctant to sell (dragged his feet on signing after verbal agreement, etc) The rejection of the credit request would be my "out" I guess.

I'll keep the post updated on how things turn out.

Thank-you again for your advice.

Susan

Originally posted by @Wayne Brooks :

First of all, odd; there are no pending/contingent duplexes in that area in the MLS. $380k value, not likely. last 12 month sales; 205k 206 237 308 320 341 and 360k. Of course a couple were actually on Dixie, and property conditions of these sales will vary, but it doesn't appear yours is perfect either.

 @Wayne Brooks

Hmmm... not looking good in your opinion?

Originally posted by @Jay Hinrichs :

@Hattie Dizmond

  9% for what is probably an A class is a pretty nice return from my point of view.

her alternatives could be to simply lend money with a quality local HML and make 10 to 12% per annum

 @Jay Hinrichs

I'm not sure what you mean by "A class" but if you are referring to the qualities of the actual property, that is a point that I forgot to mention. The location is very good... proximity to beach/ university etc. The neighborhood is above average as well, so I do believe there is an appreciation aspect that I don't want to neglect to evaluate as well. As I mentioned in another post, I am concerned that I may be underestimating expenses etc and therefore reducing my return significantly. 

Anyway, thank-you so much for your observation. That got me thinking.

Susan

@Susan Perry    everyone has a personal opinion on debt.. and if you don't like debt don't go into debt.. especially as we age... and it depends on how much cash you have, I have to assume your not spending your last liquid cent on this place..

people that are much younger or starting out and want to build empires they need debt no two ways about it.

I had two very wealthy partners last decade  1. old school ( owned a bunch of garbage companies and recycle centers.) and he had zero debt.. and it was funny listening to people try to rationalize why he should take on debt.

2. President of public corporations.. high wage earner golden parachute at 50 etc. he had interest in 20 different companies and leverage all over the place.. everything we did we hung debt on ...

both buys worth a bundle both with polar opposite personal choices regarding debt.

Originally posted by @Jay Hinrichs :

@Susan Perry   everyone has a personal opinion on debt.. and if you don't like debt don't go into debt.. especially as we age... and it depends on how much cash you have, I have to assume your not spending your last liquid cent on this place..

people that are much younger or starting out and want to build empires they need debt no two ways about it.

I had two very wealthy partners last decade  1. old school ( owned a bunch of garbage companies and recycle centers.) and he had zero debt.. and it was funny listening to people try to rationalize why he should take on debt.

2. President of public corporations.. high wage earner golden parachute at 50 etc. he had interest in 20 different companies and leverage all over the place.. everything we did we hung debt on ...

both buys worth a bundle both with polar opposite personal choices regarding debt.

 Thank-you for your experience. I have never been one to have debt. My motto has always been: "If you can't pay cash, you can't afford the product". That has been my rule, and I have mainly stuck to it as of now. I am just trying to figure out if I should think of this real estate investment choice differently as recommended by so many on BP. I plan on quitting my job (as a pharmacist) thus giving up a large source of income. I would like to start replacing that immediately but by no means do I want to make "the wrong move". 

I appreciate all the opinions of more experience real estate investors like yourself. I am relatively knowledgable about the stock market side of investing, not so much in the REI though. Here's where I digress: I believe that rentals will become increasingly relevant as interest rates rise and stock market corrections take place. That is the other reason why I am exploring this idea of REI.

I agree that with that much cash I would lend it to investors at 12% just find someone solid to invest it with as one better strategy. 

Yes using other people's money makes more sense especially if you are strong financially yourself. However you will need to invest in properties that have a much higher upside in terms of creating or finding immediate equity. Of course the cash flow has to be there to both pay your debt and generate a positive gain. It should be easy enough to do with the amount of money you have. Its a matter of understanding how to leverage your money.

I do not know your financial management style or goals. I just see the opportunity to make your money grow significantly instead of letting it just sit there on one single property then waiting to breakeven(get your money back). Should be plenty of good deals and opportunities there in Florida. Maybe find someone who is a consultant of some kind to real estate investors and have them present you with possible scenarios so that you understand better how your money can best be put to work for you.

I myself easily understand how I could take $340K or so and turn it into $1,000,000.00 in a reasonable short period of time. So it can be done safely enough but you do have to understand how. 

However if you are risk averse then follow your own goals. Some of us when we see $340K cash are just jumping like a mouse stuck in a large empty coffee can eager to get out and do our thing but its your life and your money. You have to do what you feel is right for you.

Originally posted by @Gilbert Dominguez :

I agree that with that much cash I would lend it to investors at 12% just find someone solid to invest it with as one better strategy. 

Yes using other people's money makes more sense especially if you are strong financially yourself. However you will need to invest in properties that have a much higher upside in terms of creating or finding immediate equity. Of course the cash flow has to be there to both pay your debt and generate a positive gain. It should be easy enough to do with the amount of money you have. Its a matter of understanding how to leverage your money.

I do not know your financial management style or goals. I just see the opportunity to make your money grow significantly instead of letting it just sit there on one single property then waiting to breakeven(get your money back). Should be plenty of good deals and opportunities there in Florida. Maybe find someone who is a consultant of some kind to real estate investors and have them present you with possible scenarios so that you understand better how your money can best be put to work for you.

I myself easily understand how I could take $340K or so and turn it into $1,000,000.00 in a reasonable short period of time. So it can be done safely enough but you do have to understand how. 

However if you are risk averse then follow your own goals. Some of us when we see $340K cash are just jumping like a mouse stuck in a large empty coffee can eager to get out and do our thing but its your life and your money. You have to do what you feel is right for you.

 I like what you have to say Gilbert. Yet another direction I can look into. I need to do some networking to understand my options. I would definitely be interested in lending for a strong % back. Looks like this money might be better used in different ways or in a stronger "deal". I will proceed cautiously. Thank-you for your insight.

@Susan Perry

  your accredited investor I would surmise... take a look at the crowd funding portals out there  I like Realty Shares and Realty Mogul ... both of them have 1st trust deed investments that you can put small amounts into.. to test the waters on debt investing.

for as little as I think 5 to 10k you can do a trial without spending a bunch of money you can then see how debt deals are structured and get your feet wet.. these usually bring in about 8 to 9% or a little better.. first position TD's.. local HML will usually pay a little more.

But for an experiment and something you would not loose sleep over you may want to give it a shot.. 

Originally posted by @Jay Hinrichs :

@Susan Perry

  your accredited investor I would surmise... take a look at the crowd funding portals out there  I like Realty Shares and Realty Mogul ... both of them have 1st trust deed investments that you can put small amounts into.. to test the waters on debt investing.

for as little as I think 5 to 10k you can do a trial without spending a bunch of money you can then see how debt deals are structured and get your feet wet.. these usually bring in about 8 to 9% or a little better.. first position TD's.. local HML will usually pay a little more.

But for an experiment and something you would not loose sleep over you may want to give it a shot.. 

 That's the most exciting thing I've seen all day! I created accounts for both. I'll probably be up till 4 am checking out the possibilities. I'll share any progress that results.

Thank-you Jay!

@Susan Perry

  your welcome... when the rules change to allow non accredited's you will really see these companies grow.. In fact I did one of the very first deals as a borrower for Realty Shares.. I have been with Nav Athwal the president from the inception. Watched him grow.. I have met with Jillene the pres of Realty mogul and converse with her .. one of her board of directors is one of my past business partners... So its a tight knit group and I think it offers some diversification... you still need to do YOUR DUE DILIGENCE though.. remember these are asset based loans make sure you like the asset. 

I'd do it - I buy class A 9% - 11% properties with low debt all day long (well all career long anyway). I've thrived for 15 years and many haven't (though as jay says certainly there are two approaches to life). 

I'm planning on being able to retire from my day job (which I enjoy unlike many here and it pays well so I'm not in a rush) in he next 5-10 years so my glide path gets me completely out of debt by then. Nothing wrong with it at all. Note - if you're a educated / finance savvy investor, I recommend throwing cash on cash return out of your vocabulary. It is a function of how you finance an investment, not the investment itself, which should be your focus.   You can find utterly stinking piles of crap which have great cash on cash returns that look good but are bad investments. 

If you have multiple financing avenues, Find the best investment then find the best way to finance it.  One has little to Do with the other unless you have limited resources. 

Amazing offer i loved this thank you

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