Should I do this deal?

Real Estate Deal Analysis & Advice
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Should I do this deal?

Lucas Mills
Physical Therapist Assistant · Springfield, MO · Member since 2017 · 131 posts · 28 votes

https://www.biggerpockets.com/calculators/shared/7...

The killer on this property is the flood insurance. The lowest I can get it for is $101, and that's with only insuring the loan amount as well as having the highest deductible possible. So it's really bad flood insurance at $101.

That said, the owners have said they've never had problems with water, even during heavy rainfall. They said it has come up to halfway in the backyard, but that's the worst they've ever seen it.

Anyways, what do you think about this deal? Are my expenses too conservative? I'm using 8% for vacancy, repairs, and capEx, and 10% for property management. Also, I have 8.5k in for repairs but that may be a bit too conservative. Planning on putting in new flooring in both units as well as new paint, but that's about it (right now). Planning on doing the work myself. It doesn't need a ton of work I don't think.

So, this is where I'm at. I'm looking to do a house hack but also looking to do something that will be profitable after I move out a year or so down the road and have both units rented and, hypothetically, with property management (because one day, I don't want to be managing my properties). This just barely scrapes by at a cash flow of 50 bucks per month, and the cash on cash doesn't look that great with 8.5k in repairs.

I would personally feel more comfortable at 100k. I started at 105k and we negotiated to 115k with them paying 3k in closing costs (I still have 3.5k in closing costs because I'm planning on paying PMI up front.

The property is in a fairly good area, and other investors have told me its a favorable area to be in. I know an investor that owns a duplex in the same cul-de-sac and his rent is $650/month which is what I accounted for. I think that getting $700 might be reasonable with a little bit of work and time, but I don't want to plan on getting $700/month right now.

Looking for some thoughts on this. Good deal or bad deal?

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Jeff Wallenius
Specialist · Indianapolis, IN · Member since 2014 · 670 posts · 352 votes
9y
Lucas Mills here's my $.02, so take it for what it's worth. Sellers are liars. If the property is in a flood plain that's cause for concern. If the property makes sense at $105k, don't move from that number, period. If they don't agree to that price, move on. This is a business decision, look at it no other way. $50/month cash flow leaves zero room for error, I think it's slim. Again, just my initial thoughts. Best of luck!
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  • Jeff Wallenius
    Specialist · Indianapolis, IN · Member since 2014 · 670 posts · 352 votes
    9y
    Lucas Mills here's my $.02, so take it for what it's worth. Sellers are liars. If the property is in a flood plain that's cause for concern. If the property makes sense at $105k, don't move from that number, period. If they don't agree to that price, move on. This is a business decision, look at it no other way. $50/month cash flow leaves zero room for error, I think it's slim. Again, just my initial thoughts. Best of luck!
    1Reply
  • Lucas Mills
    OP
    Physical Therapist Assistant · Springfield, MO · Member since 2017 · 131 posts · 28 votes
    9y

    Thanks.

    Well, the other side of the coin are my expenses. Is it possible I'm being too conservative in my expenses?

    0Reply
  • Kevin Childers
    Fort Smith, AR · Member since 2016 · 49 posts · 17 votes
    9y

    @Lucas Mills I would not be comfortable purchasing it for 115K and having to put 8.5K on top of that for repairs unless the ARV would be 135K or more. Just my 2 cents worth.

    0Reply
  • Lucas Mills
    OP
    Physical Therapist Assistant · Springfield, MO · Member since 2017 · 131 posts · 28 votes
    9y

    I think that at 100k I would feel comfortable, now knowing how much I will have to pay for flood insurance. Perhaps I should tell them as much and leave it at that -- 100k or I walk.

    0Reply
  • Kevin Childers
    Fort Smith, AR · Member since 2016 · 49 posts · 17 votes
    9y

    @Lucas Mills I would probably go lower than that with an offer and let them counter you. If they laugh, walk.

    0Reply
  • Lucas Mills
    OP
    Physical Therapist Assistant · Springfield, MO · Member since 2017 · 131 posts · 28 votes
    9y
    Originally posted by @Kevin Childers:

    @Lucas Mills I would probably go lower than that with an offer and let them counter you. If they laugh, walk.

     So, here's how it's gone thus far:

    Initial offer from me: 105k with 400/mo rent for 3 months for owners (owners need to stay for up to 3 months so I offered discounted rate)

    Counter: 115k with 400/mo rent

    My Counter: 110 with 300/mo rent

    Counter: 113.5 with free rent

    My Counter: 110 with free rent

    Their counter: 112k

    My counter: 115k, they pay closing costs up to 3k

    They agreed to the last counter. However, it was at this time that I found out that I would be paying $183/month for flood insurance (or $101 if I want a worse policy) as opposed to $40/month which the sellers state they are currently paying. I have a contingency to get out of the deal if I don't approve of the insurance or the financing terms, so no problem there. But that's where we're at.

    So to some degree I feel that if I come back much below (say 90k) then they will really not consider it, whereas maybe they would if I was closer to the last number we stopped at?

    I don't know. I've never done this before which is why I'm asking for help here.

    0Reply
  • Kevin Childers
    Fort Smith, AR · Member since 2016 · 49 posts · 17 votes
    9y

    From what I can tell your monthly expenses will be at least $630 just for mortgage and insurance? Based on your report each side rents for $650 a month. If you are living in 1 side you will be losing money each month by the time you factor in vacancy, repairs, property taxes, etc. 

    My reasoning is this, no matter how you look at it the numbers don't work going into the deal and they won't work later. I'm not even sure they would work at 100K. I understand that you will basically be living rent free but in my opinion if you are doing a house hack the rent should cover all of the expenses or very close to it. Not sure you can get there with $650 income a month from 1 unit. 

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  • Lucas Mills
    OP
    Physical Therapist Assistant · Springfield, MO · Member since 2017 · 131 posts · 28 votes
    9y
    Originally posted by @Kevin Childers:

    From what I can tell your monthly expenses will be at least $630 just for mortgage and insurance? Based on your report each side rents for $650 a month. If you are living in 1 side you will be losing money each month by the time you factor in vacancy, repairs, property taxes, etc. 

    My reasoning is this, no matter how you look at it the numbers don't work going into the deal and they won't work later. I'm not even sure they would work at 100K. I understand that you will basically be living rent free but in my opinion if you are doing a house hack the rent should cover all of the expenses or very close to it. Not sure you can get there with $650 income a month from 1 unit. 

    Here it is at 100k: https://www.biggerpockets.com/calculators/shared/7...

    Still, I don't know how conservative or not I'm being with my variable expenses. I feel that they're fairly conservative. And I might not need 8.5k in repairs.

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  • Kevin Childers
    Fort Smith, AR · Member since 2016 · 49 posts · 17 votes
    9y

    I think you are being very generous with your repairs. I actually did a complete rehab minus ripping out the cabinets, tub and shower in a 600 st ft apartment for $1500 in materials. I provided all the labor. I would run the numbers with only 1 unit rented and see what they look like.

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  • Sean Carroll
    Investor · San Jose, CA · Member since 2017 · 453 posts · 254 votes
    9y

    @Lucas Mills it seems like the numbers don't work out in your favor very well. You can look it at 1 of 2 ways I see it. 1. you can walk away from the deal and try to find another one that works better, if you walk away from the deal you could always tell the owners to call you if they want to come down to numbers that work. 2. you do the deal at hand and live rent free allowing you to build up more capital for future purchases and build equity on the house assuming your market goes up. (this is speculating). with the equity, it would allow you to pull out say a HELOC and use the cash for flips if you're interested in that or a larger down payment on other properties.

    0Reply
  • Lucas Mills
    OP
    Physical Therapist Assistant · Springfield, MO · Member since 2017 · 131 posts · 28 votes
    9y
    Originally posted by @Sean Carroll:

    @Lucas Mills it seems like the numbers don't work out in your favor very well. You can look it at 1 of 2 ways I see it. 1. you can walk away from the deal and try to find another one that works better, if you walk away from the deal you could always tell the owners to call you if they want to come down to numbers that work. 2. you do the deal at hand and live rent free allowing you to build up more capital for future purchases and build equity on the house assuming your market goes up. (this is speculating). with the equity, it would allow you to pull out say a HELOC and use the cash for flips if you're interested in that or a larger down payment on other properties.

    Sean, based on the report I ran with the offer at 100k, do you feel the numbers are more reasonable in this scenario?

    https://www.biggerpockets.com/calculators/shared/7...

    0Reply
  • Sam LLoyd
    Investor · Wasilla, AK · Member since 2016 · 277 posts · 139 votes
    9y

    How long have you been looking for properties, and how good is this compared to other options.  This is how I would proceed.... basically the same as @Sean Carroll said.

    If it looks like this is the best deal going, get the purchase closed, and shop for better insurance.  The key to real estate is time, so the sooner you get in, the better... you might loose a little money when you're living there, but that's better than paying rent, and as long as it cash-flows when you move out, great.  You can always sell, refi money out, or something else once become more experienced.

    However, if you haven't been looking very long, or there is nothing special about this property, and you are not emotionally attached to it, make the business decision.  Tell them you haven't found insurance close to what they stated and cancel the purchase agreement.... and do it quickly to do both of you a favor.  You can say something like this... "I'm sorry, but With the insurance quote I've got, I'd only be able to pay 90 (or whatever)."  That way, you are not being confrontational, but leaving things open should they want to come down in the near future.  I've had this tactic work for me in the past... though I was just being honest, not trying to negotiate. 

    1Reply
  • Sean Carroll
    Investor · San Jose, CA · Member since 2017 · 453 posts · 254 votes
    9y

    @Lucas Mills I think that looks much better than the previous. It gives you more wiggle room I think. If you look at the big picture of it since you're doing a house hack you're essentially putting $579 into your future a month (119+460). I would suggest if you really want to get into future properties and you can afford it to immediately take that money and put it into a high yielding interest checking out, as well as any money you are holding for future expenses. just keep a spread sheet of the 2

    0Reply
  • Lucas Mills
    OP
    Physical Therapist Assistant · Springfield, MO · Member since 2017 · 131 posts · 28 votes
    9y
    Originally posted by @Sean Carroll:

    @Lucas Mills I think that looks much better than the previous. It gives you more wiggle room I think. If you look at the big picture of it since you're doing a house hack you're essentially putting $579 into your future a month (119+460). I would suggest if you really want to get into future properties and you can afford it to immediately take that money and put it into a high yielding interest checking out, as well as any money you are holding for future expenses. just keep a spread sheet of the 2

    Sorry, a high yielding checking what? Do you mean checking account?

    So put money into one account for future property acquisition, and money into another account that I'm setting aside each month for expenses. Is that right?

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  • Sean Carroll
    Investor · San Jose, CA · Member since 2017 · 453 posts · 254 votes
    9y
    Lucas Mills yes a high yielding checking account. The one I put is 1.00% apy compared to the national average of 0.05% (I think). You could do 2 accounts if you want or one account but keep an excel spread sheet so you know which is which. I'll send you an example tomorrow if you want
    0Reply
  • Lucas Mills
    OP
    Physical Therapist Assistant · Springfield, MO · Member since 2017 · 131 posts · 28 votes
    9y
    Originally posted by @Sean Carroll:

    Lucas Mills yes a high yielding checking account. The one I put is 1.00% apy compared to the national average of 0.05% (I think). You could do 2 accounts if you want or one account but keep an excel spread sheet so you know which is which. I'll send you an example tomorrow if you want

    Ok.

    Now what about as far as the property goes - would the fact that it's in a flood zone scare you off?

    The seller states that during heavy rainfall, water has come up to "halfway" in the yard, but it has never reached the house. The house doesn't appear to have any water damage.

    So, how might you determine whether it is worth the risk or not? Or, would you be more inclined to do the deal only if the better flood coverage ($183/month) worked with your numbers, instead of manipulating the coverage by only covering the loan amount and choosing the highest deductible?

    As stated above, I can get the flood coverage down to $101/month, but it comes with a 10k deductible and only covers the amount of the loan. In a worse-case scenario, that would be a bit of a set-back, no? Or does that risk seem reasonable to you?

    0Reply
  • Sean Carroll
    Investor · San Jose, CA · Member since 2017 · 453 posts · 254 votes
    9y

    The flood zone worries me, I do not have much experience in this except for Sacramento on the river. What I would do is reach out to some neighbors and see what they say just to double check what the sellers are saying. The I would go to the county and see why it is in a flood zone. Based off google maps it seems that near by river looks like a creek.

    0Reply
  • Sebastien Hitier
    Rental Property Investor · Hong Kong, Hong Kong Island · Member since 2014 · 188 posts · 114 votes
    9y

    How much more would you need to pay for a house that is 30-50 feet higher so as to have no flood risk? There is insurance cost, and the cost when you resell...

    0Reply
  • Lucas Mills
    OP
    Physical Therapist Assistant · Springfield, MO · Member since 2017 · 131 posts · 28 votes
    9y
    Originally posted by @Sebastien Hitier:

    How much more would you need to pay for a house that is 30-50 feet higher so as to have no flood risk? There is insurance cost, and the cost when you resell...

    Very true.

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  • Casey Mericle
    Investor · Springfield, MO · Member since 2012 · 320 posts · 115 votes
    9y

     Take title subject to their current mortgage. They got a loan into 2013 for $92,000 according to the county records.   Offer to give them $5000 and you make their payments for them.  Let's say that loan is paid down to $85,000, there would be $30,000 remaining you would owe them. I'd  offer them really low payments for that $30K with a balloon.  Then you'll be able to cashflow better.  Or better yet make the 30,000 balloon in 10 years with no payments until then. 

    0Reply
  • Lucas Mills
    OP
    Physical Therapist Assistant · Springfield, MO · Member since 2017 · 131 posts · 28 votes
    9y
    Originally posted by @Casey Mericle:

     Take title subject to their current mortgage. They got a loan into 2013 for $92,000 according to the county records.   Offer to give them $5000 and you make their payments for them.  Let's say that loan is paid down to $85,000, there would be $30,000 remaining you would owe them. I'd  offer them really low payments for that $30K with a balloon.  Then you'll be able to cashflow better.  Or better yet make the 30,000 balloon in 10 years with no payments until then. 

    Hi Casey -

    I'm afraid I don't understand. Could you explain this strategy further or direct me to an article that discusses this? I am very new to all this and am not exactly sure what I'm seeing here.

    0Reply
  • Casey Mericle
    Investor · Springfield, MO · Member since 2012 · 320 posts · 115 votes
    9y

    @Lucas Mills if you could creatively finance this property or any property for that matter you can start making much better deals and profits for yourself.  BP is a great place to learn about that, just search the forums and articles.  Instead of a bank dictating tough terms on you, you work out easy terms for yourself from owners.  Good luck.

    0Reply
  • Jeff Sprunger
    Lockport , NY · Member since 2014 · 265 posts · 124 votes
    9y
    $115,000 loan at 4%, 30 years = $550 for P.I. taxes and insurance = $1200 ($100 month each) total piti is $750. vacancy, capex, maintenace at 8% = $180/month ($60 each). management is $75/ month. flood insurance $100 (I like round numbers and it is my example). what's that leave us? total = $1105 month! what utilities will you pay for? water? add another $100. I always throw in a 10% miscellaneous fee, so add another $75. now we're up to $1285/month. you need to get it cheaper! your first offer should have been around $70k.
    0Reply
  • Sean Carroll
    Investor · San Jose, CA · Member since 2017 · 453 posts · 254 votes
    9y

    @Lucas Mills, so did you make a decision yet? :)

    0Reply
  • Lucas Mills
    OP
    Physical Therapist Assistant · Springfield, MO · Member since 2017 · 131 posts · 28 votes
    9y
    Originally posted by @Sean Carroll:

    @Lucas Mills, so did you make a decision yet? :)

    I haven't really had a chance to do much looking into things since it's the weekend and I've been at work. But, it's likely that I won't pursue this one further.

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