Please Help Analyze Possible Deal

[bcampbell]

I have a potential deal and would appreciate your help in analyzing it.

This is a building in a small rural town in Iowa. Good rental market. It has 2 - two bedroom apartments and a beauty shop.

The two apartments rent for $375/month and the beauty shop rents for $250 (should be getting a lot more in rent)

Purchase price is 38K

Landlord pays the garbage and water.

Here's a breakdown of income and expenses:
Income is 1K/month (beauty shop rent is very low)

Expenses:
Down Payment - Worst case would be $7,600 (Really depends on the appraisal. I have a good relationship with a small local bank and they haven't required me to come up with a 20% down payment. It has always depended on LTV.)
Taxes - $112/month
Insurance - $65/month according to seller
Garbage and Water - $100/month
Mortgage (15 years @ 6% using $30,400 as my loan balance) - $256.53
Total fixed expenses = approx $534

Leaves $466 for vacancy, maintenance, profit.

Please let me know your thoughts on this deal.

Thanks!
Brian

[justin0419]

Brian,
What are market rents for the apartments and beauty shop?  Could you step up rent over time as the units are now or would you need to rehab things to get higher rent?

From your analysis, I think it looks pretty good.  Your numbers are really similar to our small apartment building.  I would calculate loan payments based on the whole purchase price so you're not buying down the payment amount to make it a good deal. 
In your case, payments would be $320.67 on 38k for 15 yrs at 6%.
That's about an extra $65/mo in this case which brings your number down to about $400/mo for vacancy, maintenance, and profit. 

I think it sounds reasonable and would probably do the deal if I were you.

[bcampbell]

Thanks Justin for the comments. $375 is in the low end for the 2 bedroom apartments. The apartments are nice and don't need any work. They each have their own washer and dryer! I was surprised at the condition of the apartments. The $250 for the beauty shop is at least $100 too low.

How do you go about raising the rent when you become the new owner of a property? I also just bought a duplex where the rent is too low and I want to raise the rent but not loose a good tenant.

Thanks!
Brian

[justin0419]

You can do it a couple different ways. You are going to get the tenants to sign your new lease with your rules. That's assuming there's not a lease with a term currently in effect from the previous owner. If they still have part of a 12 month lease when you take over, you'll have to follow that rent until the lease is up.
 Otherwise you can either just raise the rent amount up front with your new lease or you can step it up over time. I don't like jacking the rent up from day one. I usually put people on month to month leases anyway. There's a clause in our lease that states rent can be renegotiated anytime while in a month to month status. For that, we just send a business letter stating the new rent amount will now be $xxx as of a certain date. I always put the date at least 30 days in the future. Some places I'm sure that's the law for notice to increase the rent, but it's also courtesy for their budgeting too.
 Tenants often get spooked when the place their renting goes up for sale or is actually sold. I try not to be the guy who just goes in and raises the rent from day one. I've also had it where the inherited tenant just wouldn't play by our rules and not pay on time. Then I just evict and then put the rent where I want it.

[campbellsimon]

With regard to the mortgage, it should be noted that if the mortgage is going to be sold to the secondary mortgage market (i.e. a Fannie Mae or Freddie Mac loan) then there is a minimum of $50k that must be borrowed.

If the lender is able to keep the loan in house then the minimum is up to their requirements. If you are looking at a personal loan then I would not be surprised if you are looking at a shorter term.

[mmixon]

.....I want to raise the rent but not loose a good tenant.

Thanks!
Brian

A tenant not willing to pay market price, is not a good tenant   Most long term renters understand, even expect, that rent will go up when a new landlord purchases a property.  Just don't gouge them and I'm sure it will work out.

[campbellsimon]

Most long term renters understand, even expect, that rent will go up when a new landlord purchases a property. 

Remember, however, that a current lease is a legally binding agreement that transfers with the sale. You will bound to the terms of the lease until the lease expires or the default (which in that case, who wants them as a tenant).  Raising the rent could result in legal action. Of course, you will want to check the laws in your state just to make sure.