Need an outside opinion on this potential deal. Lehigh Valley PA.

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Need an outside opinion on this potential deal. Lehigh Valley PA.

Matthew W.
New City, NY · Member since 2016 · 47 posts · 7 votes

Hello Everyone,

I want to get some opinions on this deal. It is for three units - a duplex and a SFR. I went and saw the properties this past Friday. Turns out they are all Section 8. Tenants pay gas/electric.

Duplex

1 BR on first floor. 2 bedroom on 2nd floor.

Listing Price: $96k

Closing Costs: (5%): $4800

Down (25%): $24k

Finance Assumption: 25 years @ 5% = $420.90/mo = $5050.86/yr

Income

Rents: $650 + $750 = $1400 = $16,800k/yr

Vacancy (10%): $1680/yr

Gross Operating Income: $15,120

Expenses

Property Tax: $2500/yr

Insurance: $526/yr

Property Mgmt (10%): $1512/yr

Repairs (6.5%): $1092/yr

Water: $400/yr

Garbage: $324/yr

Supplies/Misc: $300/yr

CapEx (5%): $840/yr

Total Operating Expenses: $7493/yr

NOI: $7627/yr

Cash Flow: $2576

ROI: 7.57%

C/C Return: 8.94%

SFR

3 Bedroom, 2 bath.

Listing Price: $60k

Closing Costs: (5%): $3000

Down (25%): $15k

Finance Assumption: 25 years @ 5% = $263.07/mo = $3156.79/yr

Income

Rents: $950 = $11,400k/yr

Vacancy (10%): $1140/yr

Gross Operating Income: $10,260

Expenses

Property Tax: $1942/yr

Insurance: $430/yr

Property Mgmt (10%): $1026/yr

Repairs (6.5%): $741/yr

Water: $400/yr

Garbage: $324/yr

Supplies/Misc: $300/yr

CapEx (5%): $570/yr

Total Operating Expenses: $5733/yr

NOI: $4527/yr

Cash Flow: $1370

ROI: 7.19%

C/C Return: 7.61%

I met with the property manager. He told me that the tenants of all three units have been there for about 5 years. He's almost never over at the properties - very quiet. Actually only charges an hourly rate, but I'm budgeting for 10% anyway.

When I saw the properties, it's pretty clear that the current residents don't care much for how they live. It seems to me like there will be work to be done if/when tenants move out. However, both properties passed the Housing Authority's inspection recently.

Honestly, the thought of Section 8 concerns me a bit. It was pretty sobering to see the units. One of them had bunk beds for kids - the sheets and mattresses were old and dirty. It was kind of a depressing experience to walk through them.

The currently owner is in his mid-80's, but told me he is "not distressed" - and he's happy to hold on to these "money makers" as he has for the past 30 years. Seems like he's indicating that his asking price is firm - though I think the prices are a bit high considering work that will have be done in the future.

Any advice on negotiating this would also be appreciated. 

Thanks!

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  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    10y

    Hi, @Matthew W., these might be "money makers" for the current owner, but I don't know if I would want to jump into Section 8 right off the bat. 

    I know a lot of investors love them. If the tenants are good, the properties can be winners.

    Few things to consider:

    Your repair and Cap Ex looks low. I figure 7.5% for each on market properties. Sounds like these maybe higher. 

    Is lawn care, snow removal, etc all included in Property management?

    I just don't know if the numbers are worth it. 7.6% ROI and 9%--that not much better than you'd get in an index fund.

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  • Jonathan Emery
    Rental Property Investor · Allentown, PA · Member since 2009 · 79 posts · 5 votes
    10y

    @Matthew W.

    how did you come up with the cash flow number?

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  • Jason V.
    Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
    10y

    @Matthew W. I'd keep looking - doesn't seem like a great deal to me, and despite what the PM says, S8 will an issue. 

    And I'm with @Jaysen Medhurst - your expenses seem low. I use 10% at a minimum. Keep in mind these rents are low compared to industry average, but repairs will cost the same as if they were average or high. 

    Too much risk here for a 5-7% return in my book. 

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  • Matthew W.
    OP
    New City, NY · Member since 2016 · 47 posts · 7 votes
    10y

    @Jaysen Medhurst thanks for the notes. No lawns, but snow removal question is unknown. Property manager charges hourly rate, not flat %, but I used 10% for the analysis. If I bring CapEx up to 7.5%, I would have to acquire the property at ~$73,850k to hit 15% c/c return.

    @Jonathan Emery I used this formula: Gross Operating Income - Operating Expenses - Debt Service = Cash flow

    @Jason V. would you use 10% across the board (Prop mgmt/Repairs/CapEx)?

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Matthew W.  that's a new one never heard of PM charging by the hour.. in this context.

    on site management you can pay them a wage.. but outside PM never heard that one.

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  • Jason V.
    Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
    10y

    @Matthew W. Repairs yes, Management I use 12%, Cap Ex. starts at 10% for rough estimates, but is calculated 'actual' once I've seen the properties (estimate the useful life left of everything, how much it'll cost to replace, then do the math so you'll have the money in the bank when it breaks. 

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  • Matthew W.
    OP
    New City, NY · Member since 2016 · 47 posts · 7 votes
    10y

    @Jay Hinrichs I know, I thought the same thing. He manages and does the repairs for about 12 different properties for this owner.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Matthew W.  do you know if you need to be a licensed broker to manage in PA..

    it sounds like this is a handy man more than a manager.. ergo the hourly rate etc.

    Most states require a license to manage.. since your dealing with third parties deposits and personal financial information..

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  • Matthew W.
    OP
    New City, NY · Member since 2016 · 47 posts · 7 votes
    10y

    @Jay Hinrichs I think you're probably right about him being more the handy man. He told me he collects the rents when needed, and also has a crew that does repairs. His title was "property manager", just probably not an official manager.

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