My first property offer. Tell me what you think please.

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My first property offer. Tell me what you think please.

Jesse PollPro Member
Real Estate Agent · St George, UT · Member since 2012 · 78 posts · 8 votes

I just put in my first offer yesterday. Here it is. This property is not on the market yet. They will be asking

Asking $149k
Offer $140K
Total PITIMI $1050
To get this property I will probably have to pay full price.

Here are the rest of the numbers.

4 plex FHA loan so I will occupy 1 unit.
All leases in place.
Rents from the other 3 are $1850
Figure for monthly maintenance $200
Cash flow after expenses $600
This is not actually income. It will be banked to support future property expenses.

My purpose for this property is to gain experience and have a second home for free.

I was not sure how to evaluate this property because I live in one unit rent free.

I will manage the property myself and do most of the maintenance since I will be on site.

One other concern I have is that I will have to terminate one tenants lease within 60 days of purchasing the property.

I do not like this fact as they are all pretty new leases. Also I will contact an attorney to find out legalities with this.

To make up for terminating there lease I am thinking of giving them 60 days notice and free rent for those 60 days plus refund there deposit in full for the inconvenience. I am not sure about this part. I just want to make sure that it is a win-win for everyone. My thinking is that I am not counting on rents from that unit anyway and they were not expecting to have to move.

I would appreciate your feedback on this situation.

Thanks
Jesse

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y

Yes, the "50% rule" includes property insurance.

I would evaluate this purely as a rental, first. I think you're getting about $620 per unit, so that's $2480 for all four units. That leaves $1240 for NOI (net operating income) after deducting 50% for vacancy, expenses and capital. I think you're saying its $900 for P&I and PMI. So, that gives you $340 a month cash flow.

Now, if you move into one unit, you have 100% "vacancy" on that unit. OTOH, you're not going to wreck your unit. So, the "50% rule" number for your unit goes up from $310 to the full $620. That makes your total expense go from $1240 to $1550 and reduces NOI to $930. That puts you just about break even. Not bad, considering you're living there for free.

Do these existing tenants have leases? If so, the leases will stay in place. You can't just kick someone out to move in.

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  • Brian LevredgePro Member
    Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
    14y

    Cut your gross income in half to allow for maintenance, vacancy, management, taxes, and all other expenses (50% rule). That leaves you $925 per month to cover any P/I and leaves cash flow, if any. Ignore the 50% rule at your own risk.

    As far as asking the tenant to leave, I would still make them pay rent. There is no reason to give them free rent other than you feeling bad. If they were a bad tenant and you gave them notice, they would still be required to pay rent under the law. I don't know if Nevada has laws in place that provide for moving expenses to tenants (from the LL) who are asked to move so the owner can move into that unit. You can bet that they will be hitting you up for that money if they can. And don't refund the deposit until you have checked the unit out to make sure they didn't trash it before leaving.

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  • Jesse PollPro Member
    OP
    Real Estate Agent · St George, UT · Member since 2012 · 78 posts · 8 votes
    14y

    So if I do this I get
    $240 cash flow
    Cash on Cash return would be
    240*12/7000= 41%

    Am I analyzing this correct now?

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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    14y

    Well if your total cost to get into this home is only $7,000 with your down payment and closing cost then yes.

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  • Richard N
    Las Vegas, NV · Member since 2012 · 18 posts · 1 vote
    14y

    Agree with what Brian said above. Factoring in the 50% maintenance your rental income would equal $975 for 3 units, assuming you occupy one unit. Your PITIMI (I'm guessing the MI stands for mortgage and PMI as you aren't putting 20% down) of $1050 would put you at a -$75 a month in cashflow, which isn't bad considering you'd only pay that much in your share of the unit you're going to living in. Whatever you're putting down divided by the -$75/mo x 12 would equal your COCR, which will be negative due to 3 units vs all 4 rented out. Feel free to correct me if I'm wrong.

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  • Jesse PollPro Member
    OP
    Real Estate Agent · St George, UT · Member since 2012 · 78 posts · 8 votes
    14y

    Sorry Richard. I was not sure of the abbreviation of mortgage insurance, PMI for an FHA loan. I thought I stated up front that this was an FHA loan. Sorry for the confusion.

    I am unclear about this 50% rule. Does it account for all expenses including property insurance? I don't mean PMI insurance. I know that that is calculated in with the P/I payment.

    Let me try this again.

    $1050 includes P/I+PMI+ property insurance payment. If insurance is already included in the 50% rule then I need to back out $150.

    Doing this I am actually at $75 cash flow.

    Does that make more sense or am I still confusing everyone.

    I guess the question I should have asked is, Anyone actively pursuing 4 plexes through FHA, what kind of numbers are you getting and what factors do you use to get there?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Yes, the "50% rule" includes property insurance.

    I would evaluate this purely as a rental, first. I think you're getting about $620 per unit, so that's $2480 for all four units. That leaves $1240 for NOI (net operating income) after deducting 50% for vacancy, expenses and capital. I think you're saying its $900 for P&I and PMI. So, that gives you $340 a month cash flow.

    Now, if you move into one unit, you have 100% "vacancy" on that unit. OTOH, you're not going to wreck your unit. So, the "50% rule" number for your unit goes up from $310 to the full $620. That makes your total expense go from $1240 to $1550 and reduces NOI to $930. That puts you just about break even. Not bad, considering you're living there for free.

    Do these existing tenants have leases? If so, the leases will stay in place. You can't just kick someone out to move in.

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  • Jesse PollPro Member
    OP
    Real Estate Agent · St George, UT · Member since 2012 · 78 posts · 8 votes
    14y

    Thanks Jon. I was going to call an attorney on Monday about that. They all have leases. The last thing I want is to open myself up to a legal battle.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    You could try offering someone some cash to leave. But the leases stay in force after the sale. Unless they violate the lease, you have no basis for eviction.

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  • Jesse PollPro Member
    OP
    Real Estate Agent · St George, UT · Member since 2012 · 78 posts · 8 votes
    14y

    In my original post that is what I proposed. Is it legal for me to approach this during the due diligence period? This is not something that I can assume. I have 60 days from the time of purchase to move in. The earliest lease is 1/2013.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    This is a tricky situation. The tenants have no obligation to accept your offer. If they get the idea your desperate, they may demand something excessive. OTOH when properties get sold tenants sometimes get nervous and bail out, thinking the new landlord is going to jerk them around.

    What happens if you don't move in?

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  • Jesse PollPro Member
    OP
    Real Estate Agent · St George, UT · Member since 2012 · 78 posts · 8 votes
    14y

    I do not have enough experience to answer that question. I know that some here on BP have said it is mortgage fraud. To what extent and seriousness I do not know. I guess worst case I would get charged with fraud and the loan would be called due. Best case nothing would happen but I am still committing mortgage fraud. Not something I am interested in doing. Thank you for your feedback on this. I will check all this out.

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  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    14y

    What has the historic tenant turn over rate been for this property? If it has been relatively high, someone may move out by this summer in any case. Have you talked to the seller about the tenants? Are any of them violating any lease provisions now? Often tenants do, but landlords overlook the. Have you read the leases? You should.

    I like your strategy for a new landlord. Is your wife on board?

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  • Richard N
    Las Vegas, NV · Member since 2012 · 18 posts · 1 vote
    14y
    Originally posted by Jesse Poll:
    Sorry Richard. I was not sure of the abbreviation of mortgage insurance, PMI for an FHA loan. I thought I stated up front that this was an FHA loan. Sorry for the confusion.

    I am unclear about this 50% rule. Does it account for all expenses including property insurance? I don't mean PMI insurance. I know that that is calculated in with the P/I payment.

    Let me try this again.

    $1050 includes P/I+PMI+ property insurance payment. If insurance is already included in the 50% rule then I need to back out $150.

    Doing this I am actually at $75 cash flow.

    Does that make more sense or am I still confusing everyone.

    I guess the question I should have asked is, Anyone actively pursuing 4 plexes through FHA, what kind of numbers are you getting and what factors do you use to get there?

    I must have missed the FHA part. Yes you could take out the amount of insurance out of the 50% if you do it that way. When it's all said and done looks like you'll "earn" $900/yr just living there! I'm actually looking for multi-units that can do this so congrats to you.

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  • Jesse PollPro Member
    OP
    Real Estate Agent · St George, UT · Member since 2012 · 78 posts · 8 votes
    14y

    @ Jon K. yes my wife is somewhat on board. I think because of her fear about all of this I am moving forward with more caution. This is probably a good thing in the long run.

    I will check out the leases and find out about the rental history of the property. I have not talked to the seller. Thank you for your input.

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  • Robert AdamsBusiness Member
    Real Estate Broker · Henderson, NV · Member since 2009 · 1k+ posts · 373 votes
    14y

    This is how I see this property cash flowing using the 50% rule:

    Rent collected from all 4 units: $550+$550+$650+$650 = $2400 x .5 = $1200 for P/I+PMI and cash flow. Which is:

    $1200mo NOI - $900mo P/I+PMI = $300mo reserves

    If you are living in one of the units, subtract the remaining 50% on that unit from the reserves which is $225. This leaves you with $75 reserves monthly. However, I think you will be actually realizing more profits than this due to these facts:

    -Tenants are already in place so immediate vacancies will be minimized.

    -You can still collect rent from the tenant you are kicking out from 1 additional month. (I would give them plenty of notice but no free rent)

    -You are doing your own property management so the exclusion of the PM fees will decrease your 50% rule expense.

    -You are doing your own maintenance so the reduction in maintenance costs will decrease your 50% rule expense as well.

    With this being said I would anticipate at year end you will be happily surprised that you have substantial reserves (much more than $75x12mo=$900).

    Hope this helps.

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  • Jesse PollPro Member
    OP
    Real Estate Agent · St George, UT · Member since 2012 · 78 posts · 8 votes
    14y

    @Robert, since I posted this I have done more research and learned a lot more. I feel good about the offer on the table. I came up with the same numbers you did basically. At first I was a little skeptical and unsure of how to analyze the deal. As I have been analyzing more properties I am getting more comfortable. Thanks for your input.

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