Is this a good deal / worth it?

Question

I asked this in the landlord forum and didn't get a reply (let me know if I'm stating it incorrectly please):

I have an offer accepted on a property that is 2 three bedroom duplexes, and 10 garages. The price is $53k. 
I estimate approx $20k to fix it up (roofing, plumbing, some electric).

Garages are all rented out for approx. $360 for all of them (I can ultimately get $40 a month easily for each garage unit). 2 of the duplexes are rented $450 / month and $475 a month.

The other duplex once fixed will rent conservatively for $450 a month each.

Income: $2225 
Expenses: $1112.5 
Mortgage: $488.44 
Cashflow: $624.06

For having to put alot of money / time into it, is $624 a month total worth it?

Steven Grabowski · Answer

Actually, its 20% down of $52k (so, 10,400).

So the cash on cash return is:  59.65%

I'm purchasing it for 52k, and will be able to rehab it for an additional 26k.  The bank is financing 100% of the improvements assuming it appraises 'as finished' at a high enough price (approx. 100k).

Alex Aronson · Answer

As part of my investing routine, I look in the yellow pages and call two different bank each week to see what they have to offer.  If the bank says they are not doing investing loans right now, I often ask them when does their board members meet to set new banking policy and make a note to call the bank back 1 week after the board meeting to see if the policy has changed.  It has been my experience that if you never heard of the bank before, then that is the bank you want to do business with because they are small and want to grow.

Even with a 20 year note, the math seems to work for you.

Based on 20% down on 78K mortgage and cash flow of $517 a month, your cash on cash return is about 39.5%.  Are you ok with that return?

Good luck and post back in a year and let us know how it the deal went.

Steven Grabowski · Answer

My bank won' do a 30 year note on a commercial property.

Alex Aronson · Answer

How much equity is in the property?

Personally, if the property cashflows positive I would do the deal if I liked the area and the property does what I want it to do (IE cash flows good, or has equity to pull from for other deals, or ready to flip with minor work)

Have you considered using a 30 year note instead of a 20?  That should improve your cashflow another $90 a month?

Also, I would try calling 6 different insurance companies for quotes on the property.  I found the monthly premium can swing as much as $50 on a $100K SFH.

Hope that helps.

Michael Rossi · Answer

I think 20 years at 7% is reasonable.  I like the deal!

Mike

Steven Grabowski · Answer

20 year, @ 7%

Do you think its too high of a payment?  its possible I can get a 6.5, but it will adjust in 3 years vs. 5 years.

Michael Rossi · Answer

This still looks like a good deal to me!  However, I'm wondering about a payment of $605 on a $78K mortgage.  What is the term and interest rate on this loan?

Mike

Steven Grabowski · Answer

I found out after inspection that repairs are going to be more than I anticipated, my mortgage will now be for $78,000 (payment of 605.51).  Income stays the same.

Income:  $2,245
Expenses:  $1,122.50
Mortgage:  $605.51
Income:  $516.99

Still good enough to go for it?  I can't get the seller any lower.

(downpayment is 20% of 52,000)

Michael Rossi · Answer

I like a positive cash flow of $100 per unit per month (using 50% of gross rents as expenses).  That's for residential rentals.  Here in Ohio, I can get $100 - $150 per month for a 2 car garage.

Good Luck,

Mike

Steven Grabowski · Answer

What kinds of %'s do you look for in successful projects?  The banks want 1.2 dscr,  do you look for that and then some?  ROI at 30%?

Or is there something else to look at to be a good long term hold?