My brother and I are looking at a two-family in a town with a very reliable tenant base. Renting this property will not be a problem.
List price: 289K
Offer price: 275K
Reno Costs: 30K
Expected Income: 2400 - 3000 (total for both units, garage has storage rental potential, but not considering that for analysis)
Monthly payment: 1600 (mort. tax, insurance)
We are planning to put 25% down to secure the mortgage, and finance the reno ourselves. With the expected income, it will take us 3 years to pay off the reno before we will start cash flowing. All the numbers look bad, aside from the longterm rental income and the potential flip value. 99% of all two family homes that sold in this town in the last 180 days sold at or above list price.
We are thinking of putting an offer in tomorrow, but I've been dragging my feet for a week. I've been looking for my second investment property for over a year, and I know I need to take action, but none of the deals I've found are home runs. This one is the best I've seen and I suspect it will be gone by COB tomorrow.
What would be your net income? Numbers look like they may be slim....
Hey @Casey Charkowick I don't have input on the deal, but I was just curious if you had a minute to explain how you're co-investing with your brother, do you have a business structure already in place or how's that working for you? Thanks a bunch and good luck with this deal. Is Rhode Island as crazy as Boston is??
@Christian Nachtrieb - you should put a plan in writing and set up an llc with formal agreements on who's doing what. Legal zoom has all the tolls to set them up (although I've never used them I've heard good things for the price.)
If only we had Rhode Island prices in the Boston area...
@Casey Charkowick I think you need to do some more research to narrow down your expected rents a bit more - the range $2400 to $3000 is pretty wide, and makes a big difference.
By my estimation, it's about a 2% cash on cash return if the rents are $2400/mo, and about 5.5% if they're $3000/mo, with debt service coverage ratios of about 1.18 (bad) and 1.48 (very good), respectively.
If the realistic expected rent is $2400 I would not do this deal. I like the DSCR on the $3000 rent scenario, but the CCR is still kind of meager. I'd only do that deal if you really liked the house/area/tenant quality and didn't mind a mediocre return.
I would urge you to be realistic in your assessment of the potential rent and not convince yourself you could get more than you could realistically get. I would seek several sources to converge on a realistic rent #.
And above all, try to get past the fear of missing out. Just because properties are going fast and lots of other people are buying doesn't mean you need to buy, if the #s don't look good for the amount of work and aggravation involved.
A good article I read recently was Impatience: The Pitfall of Every Ambitious Person. It reminded me that in 2006 people were falling all over each other to buy property at prices that didn't make sense, with properties regularly having less than a week on market and above-asking prices.
I'm not saying we're at that point now, but it's worth thinking about when evaluating deals. Sometimes the best investment is no investment at all.
Thanks for the quick input everyone! After another day of thinking, we've decided to lowball on this one and make an offer of $250K because I know I can get 2400/month for both units, (same area/sq. footage/amenities as my other 2 family which has rented at 2400 with no issues for four years) but anything more is a guess.
@Anthony Thompson Your advice is much appreciated, I was getting the sense that I was moving too fast on this one, and the fear of missing out was getting to me. With the lower offer, I feel much better about these numbers. If I lose it, then I'll just keep looking!
@christiannachtrieb I set up an LLC, which will ultimately own the house, but to avoid a commercial loan, we are putting it in our names for now. We also will be financing ourselves, and expect things to be a bit messy in terms of separation of funds, so to avoid a co-migling/pierce the veil situation, we've decided to hold off on having the LLC own the property until after the reno is complete. Once it is done, we will refinance and transfer ownership of the property to the LLC for long term liability protection.
I am a corporate lawyer, so I am familiar with business entity structures/formation, but that said, anyone can set up an LLC online without much trouble. Just do your research beforehand. The thing that gets most people is not treating the LLC as a separate entity. You need to keep everything separate and maintain immaculate records. I'm happy to answer any more questions so feel free to reach out.
Rhode Island is a bit hot, but I can't imagine it's as crazy as Boston. There are a lot of good deals out there with many tenants available. I have had success with my one property thus far, and because I know my market, plan to stay local for the time being. It's worth a look down here!
@Casey Charkowick just one thing that you mentioned about not being find any home runs. I know quite a few professionals meaning real estate investors, attorneys, etc who have become millionaires many times over because they consistently hit singles, doubles, and triples. The volume of deals is where the bulk of the money is made. When a home run presents itself, you definitely need to swing at it.
If you hold out for only home runs, swing and miss, you will most definitely feel the sting. If you have been consistently hitting and all of a sudden you see the potential to hit a long ball, your all ready to go. If you miss, the impact will be minimized. Just food for thought. Best of luck with the South County deal.