What numbers would you want for this deal?

Question

Or is this something to pass on?

Deal: Triplex consisting of two 1/1 units and one 2/2 unit (I believe the 2 bed unit is first floor and the 1 bed units are on the second floor). Asking price $399,000 - no obvious needs for repair (would need inspection to verify). Rents are listed as $800 (each) for the 1 bed units and $1,350 for the 2-bed unit (these seem reasonable based on rentometer.com with potential for increase on the 1-bed units -- rentometer has them at 900-1000 range).  Taxes are $9,000 based on county appraiser's office (if it matters the county appraiser lists the property at $340,000 -- with land being $175,000 of that number).

The area is a great area.  The complex is directly across the street from a nice park that was recently redisgned by the city to add walking trails and other amenities.  The other buildings in the area are mostly 70's era apartment buildings and brand new townhome complexes.  The area was being re-developed prior to the downturn with developers buying tracts and scraping the buildings to put in the townhome complexes.  All have been sold, so no vacant unfinished areas, but no new development going right now (there is potential for this lot to be acquired should the redevelopment take off again - but I am not counting on that).  The area is very walkable with plenty of access to public transportation as well.  A few blocks away is a booming area with high rise apartments and mixed use developments.  Plenty of night-life and shopping in that area as well.

General make-up is white collar with most residents being in their 30s. Usually singles or newly married couples - not many traditional families.  There are also some students and a decent sized gay population -- so the 1 bed units will be desirable.

I really like this building and area - first time I've seen a deal that really struck my fancy, but I can't seem to get the numbers to work.  Using the 50% rule, this will not cash flow at the list price. Is it worth even looking into this further or am I letting my emotions get the best of me?  Of course, I do not have a problem making a low offer on this if the numbers work - the listing is poorly done (they estimate the gross income as the same as the net income and then list the rents that they are actually receiving and those rents do not equal those "estimates") so I don't have any problem with "insulting" someone by giving a lowball offer provided it is backed up by numbers.

Also, the plan would be long-term hold on this. I have a good job/salary currently so immediate cash flow is not a prime concern.

Thanks for any insight.

Andy B. · Answer

thanks Nathan - I totally missed the tax to rent ratio -- that is pretty high.

Thing is, these rents seem pretty normal for the areas I am researching.  Pretty much $1 per square foot unless you go ultra high-end which gets about $1.50 (the high rise apartments near this property are getting that).

Nathan Emmert · Answer

You said it doesn't cash flow at the 50% rule... in this case, I don't believe the 50% rule even comes close.

Taxes alone are 25% of your gross rents.  Add 5% for vacancies, 5% for property insurance, 12% for Property Management, 10% for repairs... you get over 50% very quickly when your taxes are that high.  In comparison, my taxes are 5% of my gross rents.

I thought Texas had a far better rental market than this.

Also remember, most of us who invest for cash flow don't "need" the money now.  What the cash flow represents is additional opportunity to invest.  Two properties at $100k each... one breaks even, one cash flows say $200 a month.  In 30 years, the break even property is fully paid for... in the same 30 years the cash flowing property is paid for, has provided a downpayment on another $100k property at the 10 year mark, a downpayment on another $100k property at the 20 year mark, and has a 3rd downpayment ready here at the 30 year mark.  The property he bought at the 10 year mark also gave him a downpayment for a property at the 20 year mark and has another downpayment ready for him here at the 30 year mark.  The property he bought at the 20 year mark has a downpayment ready for him at the 30 year mark.  He has 1 place paid for, 1 place which he's 20 years into a 30 year mortgage on, 2 places which he's 10 years into a 30 year mortgage on, and has downpayments for 3 more places.

He has 4 cash flowing properties (1 free and clear) and downpayment for 3 more in the same time you have 1 free and clear property which now cash flows.  Which position would you rather be in?

Cash flow isn't about supporting a lifestyle today (necessarily), it represents access to the scarcest commodity to most real estate investors, cash (i.e. down payments).