Hypothetical Situation: Would you buy this Property?

Question

Here's very simple hypothetical situation. Would you purchase this home if you were investor looking to hold for 10+ years.

Home Price: 230k
Downpayment: 60k
Loan rate: 4.4%
Improvements/Repairs: 10k
Annual Taxes/Insurance: 15k
Closing Costs: 15k

Monthly Payment/Expenses: $1500

Let's assume it's easy to find tenants and it commands a rent of 2500$ per month.

Nathan Emmert · Answer

Nope. Half your gross rents are going straight to taxes and insurance. Your mortgage payment is another $850 a month so that's 4 more months rent. That leaves 2 months to cover all your other expenses and cash flow, best case scenario you're at $5,000 a year in cash and that's impossible.

To get that 5 grand you're going to invest $85,000. That's about a 6% CoC return in a best case, more likely you're negative.

To get that 5 grand you're going to invest $85,000.  That's about a 6% CoC return in a best case, more likely you're negative.

Dan M · Answer

As a first timer, I want to give me myself some room for error, so I won't go much higher than 200k putting down 50k. Please let me know your thoughts.

Updating the above assumptions with this will yield the following(using several tools I found on this site):

Annual Net Cashflows: 10,000
Capitalization Rate: 5%
Cash on Cash Return: 1.97%
Load to Value: 72.35%
Debt Coverage Ratio: 1.1%
Expense Coverage Ratio: 66%
IRR over 10 years: 16.8%

My total initial outlay:
Repairs: 10k-I don't really know exactly yet. Conservative estimate
DownPayment: 50k
Closing: 13k

Total: 73k

I plan to put a 190k offer on this property tomorrow. Looks like I would need to raise the rent 200+or so-I think the repairs should command that but I'm not sure. Any thoughts/advice would be greatly appreciated.

Dan M · Answer

Andrew, good point, the current tenants are students(7 students) and paying that amount but the house isn't in great shape(they also pay all the bills). If I do 10k in renovations I think it would command 2700+. There aren't a lot of comparables since it's 3 units and most in the area are just 1.

Andrew Jones · Answer

$2500 or $3000 a month for rent is a big difference. Try and pin down the rent rate to within $100. Use the low estimate in your analysis. If you haven't already drive the area and call up all the for rent signs.

Dan M · Answer

I'm actually trying to get the property for around 200k. It's in need of repairs as the owner has neglected it. So I need to factor in about 10k, With repairs, I think it could command a rent of 3000/month. I'm a first timer, so I'm carefully trying to analyze all the important metrics.

Don Konipol · Answer

Makes all the difference in the world.  Now the deal may be marginally acceptable.

Dan M · Answer

Thanks for your response. 1 correction

Annual Taxes/Insurance are actually 7k. My mistake.

This would roughly lead to 1500 Monthly Payment/Expenses includes taxes and Fees. So your net monthly cashflow is +1k.

Hypothetical Situation: Would you buy this Property?

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