Would You Do This Deal?

Question

I'm a small-time investor in the midwest (currently own two rentals) looking for feedback on a potential deal.

Key Metrics:

Total Units - 4 (All Occupied)

Purchase Price - $165,000

Monthly Rental Income - $2,400

Projected Monthly Cash Flow - $530

Cash on Cash Return - 14%

Other Notes - All four units were renovated a few years ago so maintenance should be relatively low. I would also like to eventually move utilities back to the responsibility of the tenants. The house is located in a small college town (within walking distance to the college) and is in pretty good shape. All tenants have been there for awhile.

Monthly Breakdown:

Rental Income                            $2,400

Mortgage (25% Down; 4.75%)       ($645)

Utilities (Paid by Owner)             ($600)

Maintenance (Estimated)            ($100)

Vacancy Reserve (5%)                  ($120)

Property Taxes/Insurance            ($270)

Management Fee (6%)                 ($135)

Monthly Cash Flow                      $530

Is this deal worth it?

Kevin Barry · Answer

@Marlen Weber @James Storey Appreciate the feedback!

James Storey · Answer

@Kevin Barry seems pretty solid from a financial perspective. Being in a college town is a great upside as well assuming it's near a popular university. Don't know this market but $600/month per unit seems low for walking distance from a university which is a good sign if it is truly below market. Can't prove it from just the forum but depending on your market you might have some upside on the rent as well as moving the utilities to tenants. Unleveraged returns appear to be around 8.5% and could be well over 10% after rent increases and utilities being moved to tenant responsibility. Given the large spread between unleveraged returns and your cost of capital (4.75%) is a great sign from a financial risk view. Looks nice on the financials. Assuming market, site, and location is solid are good, seems like a solid investment.

James Storey, CCIM

Josh Franklin · Answer

@Kevin Barry seems like a solid investment. Like the idea of the college town because even though it may be smaller in population you’ll likely always have renters looking. I also like that some renovations were made recently and you shouldn’t have much maintenance to worry about.

Are the rents where they need to be? Any opportunity to grow those at all?

Satyam Mistry · Answer

@Kevin Barry Looks like a good deal. Is there any common area that should be maintained such as a lawn? Also, I like that it is a good deal with the utilities being paid by you so if you are able to get that to the tenants that would be an added extra. Is the water setup through 1 meter currently and is it normal for your area to have the landlord pay for the water/sewer?

Marlen Weber · Answer

A property in a college town is always an investment. The need for housing is always there and tenants are guaranteed.

Would You Do This Deal?

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