I have not even looked at this property yet, but the numbers look promising for potentially my first property.
Quadplex with ~2000 sq. ft. in a low-end neighborhood
Asking price: 200k
Claiming a 14% cap rate
4 units are all rented through October 2009 (this is my favorite part. very turnkey) The four units are generating $2450 in rent per month
It was renovated in 2008, and pictures are very nice.
I am waiting to hear back about taxes (just heard back… $350 per year approx), utilities, and remaining repairs that are needed (heard back, said none because all done a few months ago.
1 unit is 3/1
2 units are studios
1 unit is 1/1
Units are separately metered
My question is how should I go about evaluating the value of the property to determine my asking price? 200k is very expensive for this area, as SFHs tend to run 40-50k from my experience, but this is recently renovated and seems to be in good shape.
My other question is, when I visit, what are the important questions to ask? What things do I really need to keep in mind that could end up shocking me if I find them out later on when it’s too late? Could I discover that the property is not zoned for the amount of units in it, etc? Things like that. If any of you have a list of questions or a checklist that you typically use that would be of enormous value to me. Thanks for the help.
I am considering passing this on to an investor for a finder’s fee if I feel like I am in over my head, but it appears to be a good potential opportunity.
Some questions for you…2000 SF, so the 3-bedroom is 800-1000 SF? The other units are pretty small?
What is the area like on a Friday or Saturday night? Gang or crime problems?
Are you going to owner-occupy a unit? Are you going to put 20-25% down?
Even though the owner says everything is in good shape, that is a judgment call. I once saw a place with “all new plumbing” but the pipes were held together with blue painters tape and electrical tape.
Mortgage = $1330/month for 200K @ 7% for 30 years.
The price is too high to make any profit. You need to keep looking or plan to negotiate a much better deal.
In my area the first question that comes to mind when a 4 unit is mentioned is- Does it meet Firecode? That may mean a commercial grade hardwired fire alarm may need to be installed along with fire rated doors for on the exit doors/and or apartment doors. This is very costly to have done.
In my area 1 bed units and studios have tenants that don’t stay long. This means more vacancies.
As far as how to evaluate the property goes. It’s all about the numbers. Start at 85K-95K and go from there.
Thank you very much for your advice. For what it’s worth, the building is being offered as a part of a package for a discount with a neighboring unit. I did the ratios and the discount price of this unit alone as a part of that package is $180k. I figured that I would decide for sure after looking at it, but I probably would not be willing to pay over 160. This seems like someone bought it as a shell for 80-90, put 20-40 into it and would be happy with a 40k profit for the flip.
For 160 and with that information I just gave you, what do you think?
Jared - I noticed you are new to the board. In the future you will notice that it helps if you provide all the relevant information upfront. It helps with the analysis.
Furnishedowner did the analysis considering the $200k purchase price. If you change it to $160k, you can update his analysis to:
Rent= $2450/month (still the same)
Expenses= $1225/month (still the same)
Mortgage = $1330/month for 200K @ 7% for 30 years. Changes to $1064, which will give you approximately $160/month of positive cash flow, or $40 per unit.
This without considering any fix up you may need to do.
Now, for your $40K downpayment, you are getting just $1920 annual income for a 4.8% return on your invested capital. This is about what you can get right now with 10 year bank CDs. The CDs are FDIC insured so you will get all your principal back.
If you are going to take on the risk of property management with the liability that come with it, you should get a much better return on your investment.
Dave - not really. I do the deal screening considering 100% financing even though I know I am not going to get it. If I allow for a down payment on my analysis then I could make a lot of bad deals look good by putting 20%, 40%, etc down.
The basic idea is that we should not use the down payment as a way to make a deal cash flow.
If you really want to get into the land lord game, you may want to look into condos. Not new condos, but older ones built in the 70’s and eighties. Most are in pretty good condition, and are in subdivisions where you can pick up 4 or five units for less than 1/4 of the price of the average duplex.
Here in the atlanta market (and probably yours) there are thousands of condo units that can be picked up for 10 to 20 cents on the dollar (10k-20k), and are in decent areas with rents in the 600-700 range. The biggest cost being the condo association fees.
Ii I had learned about this goldmine in 2004 when my wife and I made our first investment in a quad at 310k, we would have ended up making and saving a lot more money.
I recognize that your numbers assumed 100% financing. I am just reinforcing the reality of the lending marketplace by pointing out that JAREDfromPA will only get the numbers you describe with 80% financing.
100% financing is just not a realistic possibility in the residential mortgage loan market these days.
I guess they are so cheap because they are not the latest and greatest in style and amenities. They are still very usable and livable, just not with the stuff that buying clients expect to see in a condo today (renters however, don’t care as they just want a decent place to live).
Association fees are all over the place depending on what what originally set up. I sold a 2 bed 2.5 bath unit on shortsale last year for just $24k with an association fee of $200 per month in an area where market rent is $700.
Jared, one quick and dirty idea you can use for looking at income properties is the 1% rule: if your gross income is greater than 1% of the purchase price, then there is potential for positive cash flow, if less then you’re facing a loss.
You’re going into a property for 200k and projecting a gross income of $2450. That’s slightly over 1%, marginal at best walking into it. Plus, always consider turning your property over to property management to make your investment truly passive. If you can’t do that then you’re giving yourself a job making $40 a month, don’t fall into the landlord trap. If you can’t afford to maintain the property completely hands free, then its probably going to turn into a headache later down the road
1% of purchase price is not enough. Closer to 2% is where you need to be. Payments on $200K @7% for 30 yrs is $1330.60 Chances are you’re not going to get 30 yrs on a rental property anyway. Property tax of $350/yr seems REALLY low for a $200K property. You’re going to need more rental income or a lower price to make this a deal.
I’ve since discovered that this realtor is infamous for shooting very high with her list prices. The building is worth less than 100k. I just wonder if low-balling her by offering such a small amount is a good idea, or just wait till it comes down which itll have to. She also called me to tell me about a property for $160k that does $1700/month. The $160k property isn’t worth anywhere near that either.
That’s why the numbers don’t lie when you evaluate a property purchase for investment the same way every time. Back in the bubble, stupid people were betting on speculation because everyone around them was making money on RE. Evaluate it and offer what it is worth to you based on the numbers. If you have down payment money and good credit, you have several things working to your advantage in this situation. If you can actually close the deal, you’re doing better than many people out there who can’t get money because of the credit crisis. It’s also the dead of winter and right before the holidays. Most people are not looking to move during the winter or make a large purchase right around Christmas. RE sales have dropped precipitously lately. The Realtor still has to feed his/her family. Pricing something exhorbitantly in this market isn’t going to help them close deals. REI has gone out of fashion as of late. Fewer people are trying to “get rich with RE” now. All of these things should work in your favor and I would offer what it’s truly worth.
I found out that the property was purchased, probably as a total rehab job, for only $24k. How much could that have possibly put into it. Even if they put in $30-50k, they’re crazy to expect to make over $125k on that kind of a deal. Thanks for the advice.