Is This a Real Deal?

Question

Hello all,

I have just recently changed my mentality about real estate investments and have decided to look for all brick rental units.  I think I might have found a deal but I am not sure if I am working out the numbers correctly.  This is my first rental evaluation.

This is an all brick duplex, recently renovated, for sale at $65,000.
I think I can get 10% financing on an investment with 5% or $3250 down.  The property taxes and insurance will estimate at $1500/yr.  That would put me at roughly $7675/yr. in expenses.  Thats $640/mo.  I believe the property to rent for $425/unit/month.  So its $990 in gross rental income.

Using the 50% rule, do i need to keep my expenses at $395/month?  That would be $990/2=495 - 100 for cashflow is $395?  Is this the correct calculation?

And using the 2% rule, these rents are only at 1.5%.

Therefore, I have 2 questions:

1.  Did I do my rule calculations correctly?
2.  What should I offer?

Any help is appreciated.

Thanks gurus.  You guys have saved me from many bad investments!  Hopefully I can stumble across a good one soon!

Tom C · Answer

Don't make the mistake of using the 50% rule on the amount of the loan.

This is calulated based on the purchase price. Putting down a large DP does not make the numbers better.

Douglas Christian · Answer

Find a deal like this directly from a Seller and let them owner finance the deal.  Then you would only and to come up with a little down and you could get really good terms.

This deal does not sound like a SOLID deal to me.  I would pass and look for something around 35k-45k that would cash flow.

I am in your area PM where this is located not for the sake of anything, but giving you good sound advice.  This definitely does not sound like a good enough deal for me to pull the trigger.

The reason why, whenever you have to crunch numbers to come up with $100 CASH FLOW then something is wrong.

Will Barnard · Answer

Or you can use your HELOC, IRA, or someone else's for the acquisition. For a buy and hold, you should certainly not settle for 10%. That can kill most deals.

Jim Doine · Answer

Josh, 5% down isn't that good of a down payment. generally the more you put down the lower the interest rate. You also want to avoid having to pay for mortgage insurance which I would assume they would require with only 5% down.Are you going to live in one side?  An owner occupied loan has lower interest. Check with a credit union or smaller local banks, someone should be able to beat 10%, thats terrible, don't forget owner financing.  Jim

Jon Holdman · Answer

You need a 20% down payment these days, if you're going with conventional financing.  If you could get it for $45K, you'd need a little over $10K with closing costs.  This would be a good deal at that price.  At $65K with that horrible financing, I'd pass.

Josh Gaddy · Answer

John,

Thanks for the help.  Every time I have asked about investment loans, 10% has been the number given to me.  It is my first rental investment, but how could I go about looking or finding better financing?  Mortgage companies and brokers dont seem to be the way.  I have good credit, good downpayment, and decent assets.  How are people getting these 7% loans?

Jon Holdman · Answer

First, you say you can rent it for $425/unit/month, then you say that's $990 gross rent.  You have a math error there somewhere.  I'll assume you really meant $495/unit.

The 50% rule says your expenses will be 50% of the rent, or $495.  The remaining amount is your NOI - net operating income.  From this, you should subtract your desired cash flow, $100 in your case.  That leaves $395 for the payment.

With your $61,500 loan at 10% your payments (P&I only) will be $542/month.  Your cash flow will be -$47/month.

With more reasonable financing, this would be slightly cash flow positive.  100% financed at 7% would have payments of $432 which would give you $63/month in positive cash flow.  Given its a duplex, you'd like to have $200.

I compute a max price around $45K for this property.  Even then, your horrible financing will be a killer.