How can you use $365k (20yr @ 8%) $3053 for your debt service figure?
With 20% down I have a total of 73k invested out of pocket and a mortgage of $292k.
Using your 20yr/8% number my debt service is now $2442/mo
$3053-$2442= $600/mo or $7200/yr difference I go from losing $300/mo to making a $300 profit. I know that these numbers aren’t good but my point is that it makes a difference.
with the 20% down…$2442/mo, $29304/yr
noi 33k- debt 29304= $3696 profit/yr
$3696/$73K= 5% roi
I know 5% is horrible but my point is that I go from losing money to getting a small return on my investment (73k).
I thought cash on cash was a good number to figure deals on, am I wrong?
Also, the 66k income that I am showing is after the apts. are up to standard with the rents. Why should I increase my expenses to 33k? I know you have the 50% rule but currently the apts make $59k/yr so my expenses should calculate at $29.5k right? What I’m asking here is that if I find a property that is being mismanaged and I know I can increase the rents by $100/mo(example) should I also increase my expense figure to 50% of the future calculated rents?
Thanks guys
What Iron Range was trying to tell you is that the money you put down does not change the quality of the deal. Let me add a little to his example. Let’s say Iron Range offers to sell you his house for $1,000,000 and it would have gross rents of $1,000 per month. Is this a good deal? Certainly not. You would be losing about $6,492 per month! If you put down $970,000, then you would only need to borrow $30,000 and you would have a “positive cash flow” of $280 per month. Is this now a good deal?
Why not?
The 50% expense figure assumes that the property is being properly managed. If the property is currently being mismanaged, then the current owners expenses are probably more than the 50% number. When you start managing the building properly and charging market rents, then the expenses should be about 50% of the gross rents.
You are beginning to sound like a desperate buyer - not good! It is not wise to try to massage the numbers to make them fit.
Have you spoken to a lender yet. I think your estimate of 7.5% on the 1st is low for that property type. I would also make the contract contingent upon financing at X% rate or no deal. I would also ask for a 30 day due diligence period and if you find anything about the property you are not happy with the deal is void.
I disagree, Mike. He sounded desperate by about post #3
g whiz,
You appear to be fixated on this deal. Why?
In a related post you said you were working with the seller alone and asked if you should bring in any professionals to help. Here, you’re asking for help and then appear to be arguing. Is it important for you to control every aspect of the deal alone? I promise that if you torture the numbers long and hard enough, you’ll convince yourself that this is the deal of the century.
I know this is new and exciting to you, but there is nothing wrong with spending the next few or more months evaluating deals without buying – just to learn. Perhaps you’re a person who has to learn the hard way? If you are not careful, in a few years you’ll become one of the “don’t wanna” landlords many here love to buy from. I suggest you get some outside advice.
It’s not clear you have any unbiased real estate advisors to help you one-on-one so I strongly suggest you hire a CPA to review your deal. It’s helpful is he’s an active real estate investor with a majority of clients that are also in real estate. (Ditto your RE attorney, by the way). This is not a tall order. Many CPA’s do this and they are relatively easy to find. He’ll explain how to evaluate a deal and assess the numbers. He might not know if this is a good deal for the area, however. That’s your job to research. There are many books on the topic but, with all due respect, it doesn’t appear that you have the patience.
Wow a lot of responses, I don’t know where to start. I don’t want to get too far off topic but I do want to clarify some things. I guess everyone has there own standard as to what is a good deal. Some are happy to make anything while the better investors have a more detailed figure that they use as an indicator of a good investment.
First issue…
This lacks too much information for a valid analysis to see if this is a good investment. Mike realized this and helped a little with this response…
However, I could still argue that if the house is located on some exotic island and it has market value of 1.5 million and I could rent it out at 8k a month, this same house would be a great deal. I got the point and am now making one of my own even though I had to exaggerate a bit.
To all this talk about being a desperate buyer… Just because I don’t cancel the deal the minute someone tells me that it’s a bad investment doesn’t make me desperate. I like to challenge things to see if they can stand scrutiny. Usually I will do this with most things that people tell me. Trust but verify, right? So when Mike’s numbers are different than mine, I want to make sure that we are looking at the same things. I know you guys have more experience and I would not be posting here if I didn’t want your help, but please don’t put me on the roaster when I am asking questions. I am not arguing with anyone.
As far as research goes so far I have read “Best damn commerical real estate”, “ABC’s of real estate investing”, and “Rich dad Poor dad”. I hit these forums and listen to about 3 podcasts a day on real estate investing. I am taking in a lot of information right now and it will take time and experience for me to process it all. I have met with an attorney and have started the process of forming an LLC, I have met with an accountant that deals with a lot of real estate, I have talked to some commercial mortgage brokers and will be having lunch with one of them soon, and I have picked the brains of my coworkers that own real estate. I may seem impatient on this deal, but I am definitely doing research.
The only point you’re making is that you still don’t understand the rule propertymanager explained. 8k a month will NOT support a 1 million dollar purchase. BUT I’m glad to hear your not desperate.
