Good deal?
I can buy direct from an owner a 3 family at 155K. Here are the rents, $800, $750, $550. All rents without utilities. Taxes $350 per month. Estimate on insurance $150 per month. Not sure about maintenance, snow, lawn, etc. Most of this I can do my self. But lets say another $150 per month. Water, probably $100 per quarter. Only real immediate repairs are a new roof, est. 10-12K. Also, should probably pave driveway, est. 6k.
The big unknown is tenant reliability. Though new to the area, I know there is high turnover and problems with non-payment. I asked the owner about history on the tenents, they are all fairly new. Only one tenant has been there more than two years. The neighborhood is fairly nice and well kept. I do know incomes are fairly low and renters have a reputation for coming-and-going frequently because purchase prices in the arae are low. So, you get people that can not buy a home as renters.
With this info., what do you think of this deal?
Here's how I would evaluate this deal.
Gross rents: $2,100
Operating Expenses: $1,050
NOI: $1050
Mortgage (P & I, 30 yr, 7.5% NOO) $1,084
Cash Flow: - $34 per month (negative cash flow)
THIS IS NOT A GOOD DEAL!
Good Luck,
Mike
What if I could reduce that purchase price to $135K?
Buy as cheap as possible.
A general rule that I use when I don't have a calculator handy is that the ratio of mortgage payment to principle amount varies roughly $100 per every $10,000 reduction in principle amount.
So a reduction of $20,000 will affect your payment by $200. I don't know the other varibles in your equation i.e. appreciation rate, age of the home, any other deferred maintenance, overall characteristics of the neighborhood, rent comparibles, ect...
But my gut feeling is that with the recent fall out of the sub-prime market, this is the best time to purchase rentable properties. I feel the next 5 years or so are going to be a Landlord's Heaven.
I was fortunate enough to have seen 21% interest rates in the mid 80's and guess what? People still bought and rented houses. I'ts Maslow's Theory in action. Hiearchy of human needs. People will always need a place to stay.
At $135,000, your cash flow would be about $100 per month or $33 per unit per month. OUCH! I wouldn't put up with 3 tenants for $33 each.
Mike
ctrentalguy - where in CT did you find a 3 fam for 155? It's gotta be in some serious ghetto, no?
Originally posted by "MikeOH":
At $135,000, your cash flow would be about $100 per month or $33 per unit per month. OUCH! I wouldn't put up with 3 tenants for $33 each.Mike
What about appreciation? Or a flip?
Betting on appreciation is simply speculation. I am in business to make money, not speculate.
Flip? What's the fair market value TODAY? Where is your market headed? Do you know some newbie landlords that would buy an alligator? A successful landlord wouldn't buy this based on these numbers. Who are you going to flip to? If you can flip it and make money, that is great and I would do it.
Just because someone offers you a property, doesn't mean that it's worth buying. It's all about the numbers.
Mike
Subprime Meltdown
So I’ve been doing mortgage loans and selling real estate for more than 9 years. The recent disappearance of mortgage products for individuals with challenged credit is due to produce some amazing opportunities for the savvy investors.
Where are these opportunities? How can someone take advantage? These are valid questions. Let me explain by telling a quick story about one of the current clients in my pipeline. We’ll call him “Mr. X”.
Mr. X bought his house two (2) years ago for $170,000. The home was new construction in a growing area of town. Because of past credit issues, Mr. X was not able to qualify for prime financing. So Mr. X secured what is referred to as a non-conforming loan. A non-conforming loan enabled him to enjoy his new home without having to meet the stringent requirements of conforming Fannie Mae, or Freddie Mac products. Mr. X was able to obtain what's know in the industry as a 2/28 ARM (2 years fixed, amortized for 30 years). This means that at the end of 2 years Mr. X will most likely need to refinance his mortgage due to his interest rate increasing at the end of it's 2 year fixed term.
This type of loan has been the doorway for many Americans and a way to experience the dream of home ownership. Mortgage Brokers, Banks, Loan Officers etc... pride themselves in presenting these products as “Second Chance Financing”. All one needs to do is make the monthly mortgage payments on time for two or three or five years then at the end of the fixed term, refinance and obtain a decent 30 fixed rate. Sounds good in theory. The only problem was that on the horizon was the Perfect Storm.
The Perfect Storm
After point of sale origination, mortgage products are bought and sold by investors in the secondary market in bulk packages of 100 million, 200 million, 500 million etc...
Entities invest in conforming as well as non-conforming products. The largest purchaser of mortgage products being Fannie Mae and Freddie Mac. Over the last couple of years approximately 49% of mortgages originated were non-conforming products such as No Money Down, Stated Income, High Debt-to-Income, No SSN#, Poor Credit Profiles or Introductory ARMS with high end of 2 or 3 year term adjustments. Anyway many of these high risk loans defaulted at the end of their fixed term. A high percentage were 1st and 2nd payment defaults. As of March (I believe, don’t quote me), investors initiated full recourse requiring originators of bad loans to repay the cost of defaulted mortgages. Many lenders being unable to do so had to shut their doors and those that didn’t changed their underwriting guidelines so drastically that we in the industry nicked named it as “Black Friday”. It was so bad that wires were literally being called back at the closing table.
Getting back to my customer.....Mr. X purchased his home in an area where the builder secured creative financing for more than 70% of the new home buyers. This caused the foreclosure rate in his subdivision to exceed normal parameters affecting overall property values in his neighborhood. Stated plainly Mr. X’s $170,000 house was worth $125,000 at the end of two years. To make matters worst, the products once available in the sub-prime market ceased to exist. The payments on Mr. X’s home has already began adjusting upward and by July will be more than he and his wife can afford.
Though this scenario isn’t receiving much press across this great nation of ours, I have heard thru affiliates, peers, fellow associates that this is exactly what’s being played out in many neighborhoods. One might ask how can any good come from the above mentioned example? Let me explain again by using an old cliche, “One man’s trash, another man’s treasure”. From the investor’s perspective this market correction is God Sent.
I predict that this shift in the market will cause with two basic positive results to emerge:
1. An increase in market rents on single family residential
2. An increase in available inventory priced at 60 -70% of the market value.
For more info check outhttp://www.kiplinger.com/features/archives/2007/03/foreclosure.html
Dick,
You are absolutely right. That is already happening here in my little corner of Ohio. Lots of foreclosures, increasing rents, and lots of houses being offered at a big discount.
Mike