Deal? Or No Deal?

General Real Estate Investing
1

OK, here’s the situation:

Triplex, 2 units rented, the vacant is unit currently being rehabbed. One rents for $675/mo.(that lease is up in September) the other unit rents for $525/mo. (on a one-year lease). $1200 currently coming in, $1725 potentially once the final unit is rented.

List price is $163,000. Financing is not a problem. I plan to take out a Home Equity Loan for $33,000 to cover 20%, (@ 8.49% for 15 years), then I’ve found a 30-year fixed rate at 7.5% for the remaining 80%. Current owner is not interested in assisting in financing. As far as comps go, it’s the lowest of any 3+ unit apartment building in the city by far. Everything else is $210k and up.

Current lease calls for landlord to pay water bill up to $100. Anything over is the responsibility of tenants. Landlord pays for common lights with a bill totaling $12/mo.

Here’s how the monthly mortgage payment breaks down:

$909 (80% loan)
$325 (20% home equity loan)
$109 (taxes)
$100 (insurance) – not sure about this one, usually $70-80 for principal residence. Figure higher for rental property.

Total PITI: $ 1442
Add water and common lighting: $112

Grand total: $1554

I can cover the negative cash flow with commission check I’ll get for 3% of the sales price ($4890 - I’m an agent) for at least a year if the 3rd unit somehow fails to rent. If I continue with the property management company, it’ll cost 8% of the $1725 coming in. So: $1725-$1554-$138= positive cash flow of $33/mo. Not as much as I’d like, but the interest rates are good (especially considering it’s an investor loan), and if I can get assistance with some of the closing costs, it’ll be minimal cash out of my pocket.

I’m having trouble with vacancy rates and maintenance (what do you figure for these, and how do you figure it?)

I’d appreciate any thoughts.

2

Beemnseven,

This is a bad deal. You have only figured a small portion of the expenses involved in operating a rental property. Throughout the United States, operating expenses (including capital expenses) run 45% to 50% of gross rents. So, in this case, operating expenses would run about $862.50, leaving $862.50 to pay the mortgage (principal and interest). Unfortunately, you would be paying $1,234 (909 + 325), leaving you with a negative monthly cash flow of $371.50. UGLY!

I’d pass big time!

Mike

3

Mike,

Is your assessment of the deal based on the fact that only 2 of the 3 units are rented out? Does your opinion change assuming all three units are rented with the full $1725 coming in?

Aside from the mortgage payment, which obviously includes principal, interest, taxes, and insurance, what else figures in with operating expenses? I know there’s a percentage you have account for with vacancy and maintenance. What else have I missed?

4

Beem,

You don’t want to be a “motivated” buyer…do you?

Follow thru the posts on this thread entitled, “By the Numbers”:

http://www.reiclub.com/forums/index.php?board=29;action=display;threadid=17847

You’ll get Mike’s reasoning on things…

Good deals are not easy to come by.

Probably not what you wanted to hear…but you need a much steeper discount.

If I had to bet…I’d say that a good 80% or more newbies think they’ve found a good deal…but end up being way short of anything meaningful.

Just my 2 cents.

5

Beem,

I assumed in my analysis that all three units were occupied. This is a bad deal even with all three units occupied. There are a bunch of expenses that you haven’t listed. Expenses such as entity maintenance, evictions, legal fees, major damage caused by tenants, lawsuits, office expenses, tax preparation, bookkeeping, municipal fines and fees, fuel for going to and from the property, management, screening tenants, advertising, filling vacancies (if you use a management company), telephone expense, etc, etc, etc. These expenses really add up in the real world.

Good Luck,

Mike

6

I appreciate your input. I’ll check out that thread. For what it’s worth, my first inclination was to walk away.