[Calc Review] Help me analyze this deal

5 Replies

Little background. The way I purchase properties is a little different from what I've seen from other members. I basically have assets that the bank allows me to borrow against. Kind of like a home equity line but the assets are not real estate. I do not owe specific monthly payments. If I want to pay the interest, interest + principle or nothing at all I can. Anyway, the interest rate is variable and is currently at 6.22%. I was a flipper which made all this easy because I would just hold the property for a short time and then pay the line of credit off at the end. I recently started purchasing rentals. The plan was to purchase properties with the LOC (no cash needed) and pay the LOC down just as if I had a mortgage until I refinanced the property and paid the LOC off completely and was left with a mortgage. Rinse, repeat.

So, I came across this triplex in a B area. It currently has 2 units rented and the basement 1 bedroom unit is vacant. No repairs are needed until the current tenants move out. Even then there are no major issues. Currently has a new roof and new HVAC. When all units are rented it should rent for a total $1,850. Being new to the rental side of this business I'm finding it hard to meet the rules for rental investing. Cheap properties are in bad areas which have low rents. Higher rent areas have more expensive properties. From what I've found in the area, to get $1,850 in rent you have to spend more than $150K. Even if you were to by a distressed property in a decent area, those are expensive at this time too plus you have the reno costs.

Anyway, I'm looking for more cashflow at the moment rather than equity. Anyone have any input on my current situation?

Thanks!

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@Bryan M. vacancy is highly regional but yours seem low, only 1 month out of 12 for all three units. No property Management 10%. Capex way low. Example: flooring 3 units @ 1000 sf = 3000 sf. 3000 sf @ $6 sf = $18000 / 8 year life span / 12 months = $ 188 per month for flooring. Still have roof, hvac, etc. I use a total of 15% for repairs and capex. If you put 20% down and leverage your cash flow will go up $270 per month.

If cash flow is your goal, this is not the property to accomplish it with.  Some of your expense categories may be too low as 3% vacancy is very unlikely, particularly since you'd already be starting with a vacant unit, and despite the fact that the units won't require much work, in the long run you could be looking at 15%-25% between repairs and capex, which you currently have allocated a combined 10%.  Bringing those three expense categories up to 8% each will knock a couple hundred off your monthly cash flow, and at $1,850 coming in per month it's just not worth it.  Not to mention you may want to include another 10%+ for property management.

Also, if you're in a position to obtain conventional financing, you should be able to get an interest rate at least 50-250 bp less than your line of credit.  Though nice for flipping, I wouldn't use it beyond acquiring the property as a cash buyer, potentially setting yourself apart from other offers.  I wouldn't want to be carrying that thing around for 15-30 years though.

Thanks, @Tim Herman . I figured with the long term tenants already in place and requiring a 12 month lease the vacancy rate would be alright. I self manage at the moment so no fee there. I do not have 20% cash to put down. Using the 50% rule or the 2% rule, one would need to rent out a $150,000 property at around $3,000 a month for these to work at 2% vacancy, 5% maintenance, 5% Cap Ex. With your percentages you would have to rent that property out for well above $3K to make those rules work. Should I not use these rules to evaluate properties? Maybe just determine if I'm comfortable with the cashflow at the end of the month and make the decision? What am I missing here? Thanks for the help.

Thanks, @Brandon Roof . The plan was exactly what you mentioned. Use the LOC to obtain the property then go out and get a mortgage on the property. I guess I'm just finding it hard to create any cashflow when evaluating properties. I will adjust my vacancy/maint and cap ex from here on out. Thanks for your advice!

@Bryan M. 2% is unlikely in b class areas, you are lucky to get 1%. 50% rule is if you include property management. Long term mine are between 43% to 55% expenses. You could house hack and move into the vacant unit for a year and get a3.5% fha loan