All Forum Posts by: Michael Pierri

Based on the information provided, the deal seems ok, but not great, at least from a cash flow perspective. It appears as though you are counting on the appreciation, which is a bit speculative. Also, it seems odd that the 1/1 rents for almost the same as the 2/1, I would double check the market rents in your area. Those seem to be your biggest risks. On the plus side, you should have some positive cash flow. Good luck, keep the thread updated with your progress.

Generally speaking from an economic perspective, interest rates increase when inflation increases in an attempt by the central government to control the pace of inflation. Increasing inflation implies housing prices would be going up, not down. Your real estate holding would be worth more in a rising interest rate environment, and in contrast, the rising interest rates will increase your debt service and the price of property being purchased. As Russell mentions above, the interest rates will likely be modest as first, and it could be years before the US returns to a "normal" interest environment. Personally, I would not worry too much about interest rates. They are low, and even if raised, they will still be low in comparison to historic averages.

I meant to add, the book "What Every Real Estate Investor Needs To Know About Cash Flow...And 36 Other Key Financial Measures" by Frank Gallinelli does a good job explaining the numbers/valuation side of real estate investing. The book focuses mostly on commercial properties, but you can apply the valuation and finance techniques to residential RE.

Many investors will use a CAP rate. CAP rate = Annual NOI/PRICE. To calculate CAP, you'll need to estimate the operating expenses, 50-60% are standard operating expense rates. The CAP rate is somewhat trickier, essentially it's the rate of return of the NOI you are willing to accept, or that your market will bear. I would recommend you to research CAP rates further.

Example - 

Annual NOI = 3000-1800 = 1200*12 = 14,400

CAP rate = 10%

Price = 14400/.1 = $144,000

If you're good with numbers and time value of money finance, you can evaluate the property for your holding period, estimate the rents and expenses, calculate the estimated future annual cash flows, and then calculate a present value (purchase price less repairs) of the estimated future cash flows based on your required rate of return.

It's been a long time since I listened to #61. I think most of the BS in MF is really more applicable to apts, and larger commercial deals. Meaning, if the seller is BS'ing you, it's an attempt to show the seller that CF is stronger than it really is, and thus getting the buyer to pay more for the property.  For commercial RE, one should request a Schedule E to verify the buyer's rental income with their tax documents.

Valuing a duplex should be more straightforward. You should be able to predict CF based on market rent of similar properties.

I don't think there is much else you really need from the seller. You can request a portion of their tax return to verify the rent roll for the duplex, but that seems highly unnecessary. Your market research on rent rates and your local market knowledge are more useful in evaluating the property, in my opinion. 

I would use 5-10% as the vacancy percentage. If you are confident that the unit will be rented consistently, 5% is good. Many rental properties in Gainesville are always rented, but it is prudent to build-in vacancy into your calculations. 

May I ask what neighborhood or zip code the property is in? I have lived in Gainesville for over 10 years and have been a student and renter in several parts of town. I am assuming each unit is 2 bedrooms, so at $825 per unit that is a little over $400 per bedroom. That is reasonable, depending on the location and the quality of the duplex; however, many multi-families rent for less than that per bedroom, it all depends. Look at craigslist to see what other duplexes/SFHs are renting for in that area to determine the estimate rental price. I find Zillow to be inaccurate on a lot of their estimates.

Also, if the property is in one of the more "college" areas of town, make sure to rent the unit from August to August. I sometimes see houses in my neighborhood (one mile from campus) stay vacant during an entire semester because the landlord did not get the property rented early enough. When I was renting, we had to renew our lease for the following year by the end of February or the PM began showing the property.

Go Gators!