Is this a deal worth pursuing?

Question

Hello,

My name is Drew and I'm interested in BiggerPockets and have listened to couple webinars and a hand full of podcasts. Im really interested in investing in the Dayton, Ohio area specifically the 45403 area. I've analyzed a couple dozen properties in the area. Here are my numbers on one of the deals in the market I'm interested in. Can you guys give me any feedback on my analysis?

Here is a deal that I put together. The numbers on the excel sheet are calculated at the full asking price with 3 months of vacancy factored in.

Work needed:

$15,000

Purchase price:

$20,000 - $27,000

Thanks for your help and your time.

Andrew Johnson · Answer

@Drew Scott For whatever it's worth I'd say look at deals through the lens of 25% down on a 30 year fixed rate mortgage.  That way you're keeping the variables "equal" when you look at returns.  Not that it's material at all on a $35K property (reasons below) but here are my thoughts...

1.) Do you have someone lined up to give you a ~$28K mortgage?  Most banks have mortgage minimums of $50K or $75K.  If you can't get a loan and/or don't have $36K in the bank, everything else is moot.

2.) I'm not 100% sure why you'd be paying $300 per month in utilities.  It looks like an SFR so is there something in the Dayton or Ohio law that makes the owner pay 100% of utilities?  Maybe there is, I'm certainly no expert on Dayton or Ohio!

3.) If you think there will be perpetual 25% vacancy, don't buy the property.  Full-stop.  End of discussion.  This isn't a high-end house where you need someone to pay $6K per month in rent that's likely relocating for work.  That's a narrow, narrow focus.  This is a low-end 1950's small SFR rental.  The rental populace should be large.

4.) It's always hard to cash-flow with a 15 year mortgage.  It's great that you pay down the note quicker.  It's great that you pay less interest over the life of the loan.  But it's going to hurt cash-flow.  Now if you have a commercial portfolio loan that necessitates a 20 year amortization, I get it.  However, if you can get a 30 year fixed-rate mortgage in this "cheap money" time, I'd take it.

Paul Amegatcher · Answer

I use the 2% rule for Properties within Dayton city limits. If it rents for $700 then I want to be all in for $35k. Based on the area I would push for an all in purchase plus renovations of $40k. Also your rents seem a little low.

Paul

Nathan Rude · Answer

Is the house worth 45k? All things considered, I think 8.9% is pretty low for Dayton.

Nathan Rude · Answer

That doesn't make much sense to me. Here's a few questions I had

• What is your ROI? If it's not positive don't bother with the house.
• 25% vacancy seems pretty high. Why so conservative?
• How did you come up with repair costs?
• Is the house worth asking price + repairs? I'm guessing not since it's been sitting for a long time.

Personally I would do a 30 year mortgage to increase cashflow, but that's a personal preference.

John Leavelle · Answer

Howdy @Drew Scott

Your analysis is confusing.  You need to list items in a more simplified manor.

Purchase Information

Rehab Costs

ARV

Income

Expenses

Cash Flow

NOI

COCROI

Questions:

1.  Are you saying you have 25% for Vacancy?  Why?  Bad neighborhood?

2.  40% of gross rent or operation expenses into business savings????  When analyzing property cash flow you need to keep each item on a separate line.  Spell out exactly what you expect the cost for each is.  I am not sure what you are trying to do here!

3.  Why did you not include Property Management or CapEx?  These should always be included.  If you are trying to be conservative, then, you need to include them.

4.  Why would you want an investment property that has negative cash flow?  15 years or 30 years for a mortgage is a personal decision.  Are you investing in Rental properties for Cash Flow or not?

5.  You did not include any information regarding what the Fair Market Value/ARV would be after repairs.  What is it?  Are you paying too much for the property?

Based on you post/analysis this is not a goo deal to me.

Drew Scott · Answer

Yes it does. The numbers run here are purchasing the property at asking price, with 3 months of vacancy, and 40% of operating expenses going into business savings. In this example the -$842 a year would have to be deducted from the operating expenses.

Ozzy Smith · Answer

does that say negative $70/m?

Drew Scott · Answer

Here is a better image of the numbers

units

1

gross potential rent

8,400

rent per unit

700

other income (affected by Vacancy)

0

vacancy

3 months

gross potential income

8,400

property management fee

10%

vancancy

2,100

other income (not affected by   vacancy)

0

cap rate

effective gross income

6,300

purchase price

35,900

operating expenses

entry cap rate

0.051754875

insurance

400

property taxes

1,222

market cap rate

6.00%

maintenance

2,520

valuation

30966.66667

utilities

300

equity

0

rent control fees

property management fee

0

down pay

7,500

total operating expenses

4,442

monthly mortgage

225

15 years @ 5%

Net operating income (NOI)

1,858

annual profit

-842

monthly profit

-70.16666667

Is this a deal worth pursuing?

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