I’ve analyzed several deals over the past 2 or 3 weeks and finally have come across one I think might be a winner. It’s a 4-plex in a nearby college-town. The house is about as far from the university as you can get while still being in the town (about a 1 mile/20 minute walk). Asking price is $179,900, and supposed rent is $650/month for two of the units (2 bed), $675/month for the other two (3 bed). This property also comes with a 2 unit garage. It was built in 1940 and has been on the market for 131 days. Owner paid water and heat from what I can tell off the listing sheet. Would also have to include lawn care (small yard) and snow removal (side walk).
Projected closing cost (provided by lender): $8,000
Down payment (20%): $35,980
Mortgage (30 yr fixed rate at 4.75%): $751/mo
Vacancy (5%): $132.50
Maintenance (10%): $265
Insurance (their number): $158.75
Property Tax: $304.17
Utilities (complete guess at this time, $2500/yr): $208.33
Management (don’t plan to use): $265
Cap Ex (10%): $265
Contingency (5% added to all expenses)
Total Monthly Expenses: $2467
Rent Income: $2650
Monthly Cash Flow: $183
CoC ROI: 5%
Rent (numbers provided by listing agent, will need to verify 100%)
Insurance (probably won’t change enormously, though)
The reason the seller is selling
Notes: To me my estimates seem conservative (which I always aim for). With a perfect situation (ie removing management fees and the 5% contingency), I end up with over $550/mo in cash flow. This says to me that, even in the event of a miscalculation I’ll still cash flow decently. Am I missing anything crazy? I think I might even be able to get a slightly better deal on this place, solely because it’s been listed for over 4 months. I have not visited the property yet, but barring any crazy notes from the listing agent, I will likely set up an appointment in the next week or so. Let me know your thoughts.
Your projection for cash flow seems low, a lot of expenses. If you remove the management fees, it opens it up a little more. Definitely look into how you could minimally improve the property to raise the rent rates, say $25-$50 per month, which would help raise the number.
What is the market value of the property? Is it listed at full price?
@Greg Lott Not to be the "cold water" guy but if you've only been looking for 2-3 weeks and it's been on the market for 130+ days it probably isn't a winner. At $180K you only need $45K down and I'd posit that there are plenty of investors in any market with $50K to toss around. However, odds are they are investors that use a property management company. So you don't want to "bid high" because you want to self-manage. What I would encourage you to do is look at how much less the purchase price has to be to drop the mortgage monthly payment by $265/month. I'm guessing it will be around $50K.
So just for the ease of quick analysis, the "market" may value the property at $130K even though they're asking $180K and it *might* work for you since you self manage.
But this is all putting the cart before the horse. You really need to iron out utilities, actual *collected* rents, and even things like weekly/monthly landscaping costs.
@Andrew Johnson I NEED the cold water guy to come in here before I miss something or fail to take something into consideration. I think I have a real opportunity to get it discounted since it's been up for a while. Again, I still haven't visited the property, so there might be some glaring issues which making it clear why it's been on the market for so long. I definitely want to work out as many utilities as possible before I even consider dropping an offer, and I'd like to verify rents too of course, but these are my typical due diligence tasks. Thanks for the feedback.
@Stephen Dickey yes it is listed at full price. The tax assessment was for $225,000.