Would you do this deal?

Question

Would you do this deal for 4 full duplexes:

Asking:  $241K
Sales/Offer:  $220K + $40K rehab = $260K  ($32.5 each)
Monthly rent:  $650 (average)
Monthly estimated expenses:  $1,325 (including taxes and insurance)
PI:   $957 monthly (30 year, 5.75%, $164K, 25% down)

My calculations:

2% - Must generate $5,200/month     Actual:  $5,200 (gross)
50% - $2,600                   Estimated:  $1,325

Annual Return based on est. expenses = $30.2K, 30.2% or $299 per door 
Annual Return based on 50% rule = $16.5K, 17.4% or $172 per door

I tried to do all estimates on the high side (especially rehab costs).  Rent for 4 units is actually $700 (larger units) but I estimated on low side.

Questions:

1.  Would you do this deal?  Estimated expenses are lower because I will be managing.

2.  I have a fully paid for property valued at approximately $300K which realizes only about 8% return (my first purchase which was a total learning experience.)  Would you get financing on this property and make a cash offer at a lower amount?  There are 2 more properties in this group that should be available in the near future.  One is already foreclosed on but not on the market.  This would leave me with more cash if I pull out almost enough to cover purchase and rehab.

3.  What rate of return do you expect to get on your investments?

Please feel free to make ANY comments.  Iâ€™ve done the numbers using the guidelines on this site, and in several on-line calculators and they all show that this is a good cash flow property.  However, this is a lot of cash out of pocket.

Thanks.

Brendan J. · Answer

Best of luck. Let us know if you win the sale.

Dee Y. · Answer

All the previous tenants were paid to vacate at foreclosure.  There is one other unit awaiting foreclosure.  I spoke with the tenant and he said they are paying $650 per unit.  I checked some of the local listings and units in this size range go from $625 - $750.

When you say your going to manage does this mean these units are in the town you live in?

Jay Heinrichs · Answer

When you say your going to manage does this mean these units are in the town you live in?

I would keep debt to a the minimum that your comfortable with.

then the question is occupancy rates. Proforma rent and actual is a big diff. depending on location

Brendan J. · Answer

Slim,

You've got the general idea of the 2% and 50% rules. Keep in mind though that we can't MAKE the 2% rule apply, the rental market in your area decides this for us. If the rents are already scheduled at $5,200 then you're good, remember you can't just decide $5,200 SOUNDS reasonable and simply raise rents to that mark.

I agree that you can take off some expense dollars by managing yourself, but I think you're setting yourself up for disappointment to think that expenses will only be 25% of gross rent. I think that 40%-43% would be slightly more accurate. That being said, I would still do my math on 50%, and if you want to make the numbers look prettier in real-life, so be it:

$5200 / 2 = $2600 monthly after expenses.
$2600 - $957 = $1643 ($200 per door)

$1643 * 12 = $19,716 Annual Profit
$55,000 (25% down on $220,000) + $40,000 (rehab) = $95,000 cash invested

$19,716 / $95,000 = 20.8% Annual Return

Honestly, it looks very good on paper. How sure are you of the rent price? How has vacancy been lately? Is there much deferred maintenance you would be concerned about after the $40,000 in rehab? Is this a warzone? Do you have the $100K required?

Slim, 20.8% is a very good return. Most people here would agree that 15% and above is when your money starts working for you. You've beaten that out comfortably.

If you like the way these homes look in person (something we can't do) I would say you could have a good opportunity on your hands.

Steve Babiak · Answer

Seems the OP has already done an analysis for the dollars and cents.

So to determine if this makes sense, the neighborhood and the comparison of the units in this property to units elsewhere should be considered.  Can you keep it occupied with good tenants, or will it be having vacancy issues and less desirable tenants?

Some of that is hard to do over the internet ...

Bill Gulley · Answer

Jon H. should be all over this....he loves analysis. My questions is, do you work for free? No management fee considered? I'd want it to be worth my time and my money.

Dee Y. · Answer

Help me out somebody!!!