You need to include all the info you can. What's the property insurance? How much for repairs/rehab? What's vacancy rate? How much are the utilities? Property management fees? Reserves? What are your loan terms? Down payment? These are the types of questions that we need to know before making an informed opinion. :cool
The seller has the properties paid off and is desparate for cash. He’s not very smart and has done a horrible job managing these properties. He’s asking $350,000 for both properties, which is way overpriced. What price would you pay?
We are in this for the long run. All profit will go toward the principle we owe.
In my mind putting down $75,000 down and having an additional $15k for reserve is a lot of cash to put into a $300k-$350k property.
If it was me I would offer $255k and hope to get it at $290 w/ no more than $50k down.
However, I am confused - you say there are no immediate major repairs and less than 5% occupancy, with the current rental rates a little under market but not astoundingly so. How has the current owner “done a horrible job managing these properties.” ??? Based on the numbers the management isn’t “horrible.” This is especially if you project what a potentially higher vacancy rate you may have if you charge full market rates. We don’t know. it may not have any effect. It depends on your individual market.
Make sure you're not using the potential rents as an indicator of the property's current value. This deal has to make sense(and money) in its current condition. Remember, you have to make a profit from day 1. Anything else in the future is a bonus. I would put down only what I had to on this deal. Check you return on investment. Divide the annual positive cashflow by the upfront costs(down pmt. closing, repairs, etc..). Using propertymanager's #'s (which are usually dead on), your ROI or cash on cash return is this
$3300/ $75,000 = .044 or 4.4% ROI
You can put that $75000 into a CD or money market account for that kind of return without the hassles. Even all the rents were $750, keeping everything else the same, your ROI would be 10%. Just my two cents(for what it's worth). Good luck to you. :beer
Good move on the purchase price. If the seller is that desperate then he will bite. If not, there are lots of great deals out thier for rental properties, you just have to search long and hard. In regards to your reserves, be prepared to eat into that money sooner then you think. Stuff always breaks or tenants skip out on praying rent. You never mentioned how many units the property has…Care to share?
I look at my cash on cash return (return on investment). It depends on how much your acquisition costs are. Since each property is different, you can’t have a set amount per unit that works with all properties. If you divide your positive annual cashflow by the amount you paid up front to get the property, you get your cash on cash return(ROI). I think anything above 10% is a decent ROI. That would be the minimum ROI I’d accept. :beer
I like to earn $100 per unit per month on my rentals. I do not use ROI because that is easily skewed. For example, if you put $1,000 down on a SFH and your yearly profit was $100, that would be a 10% cash on cash return. I certainly wouldn’t deal with all the hassle of running a business for $100 per year ($8 per unit per month). In addition, if you wanted to have a cash flow of $10,000 per month, how many rentals would you need at $8 per unit per montn? ONE THOUSAND TWO HUNDRED AND FIFTY UNITS!!! YIKES! That’s why I go with $100 per unit per month.