Welcome to the board!
I would never use an internet program to tell me if I should spend nearly 100k or not. Many Realtors and probably many of these internet programs will tell you a property will cash flow if the rent covers the mortgage or maybe the mortgage/property tax/insurance. You are probably pretty accurate on your interest rate for the loan. That’s about what we’re getting right now. You need to look and see how long the bank will be willing to stretch out the payments. Most of our places are on 10 yr amortizations. Will this work for you or would you have to have 30 yrs to make it work? We don’t use any software to help us decide our purchases. We screen by looking at if the potential rent is 2% (or think of this as the monthly rent x 50) of the purchase price or not. If we can’t get the price down in that range, we pass and wait for it to come down. We know from experience what our insurance will cost almost to the dollar (we use the same company and the premium for our LL policies is based on the value we choose to insure the property at). We then look at how much the property tax is on the house. If it looks good so far, we’ll go check out the property and see what repairs are needed. We get estimates on anything that we’re unsure about the cost. Factor this all together and then see if the deal makes sense or not.
For a $87K property, a 6.5 cap gives you a net operating income of $471.25 per month. If you are putting 20% down, 30 year fixed rate financing at 6.5% will cost you roughly $440 per month to service the loan.
Assuming your overhead expense numbers are solid and your cap rate figure is correct, you will have just $31 per month positive cash flow – or, $8 per door per month.
$31 cash flow per month is $372 per year. When you divide your cash flow by your 20% downpayment, the yield on your investment is just 2%. You can get a much better yield with long term bank CDs and your principal will be guaranteed.
I don’t think you can expect a 100 year old property to appreciate or even hold its value in todays market.
Just because you might get a positive cash flow at this cap rate, you are not even close to a good deal in my book. You will be a lot closer to a good deal if you can get this property for $47K.
For 100 year old property, expect high maintenance/repair expense, as well as possible lead based paint and asbestos issues
Thanks Dave and Justin for the wonderful advises. Being first time investor is definitely a challenge. I want to ensure that first investment goes sour and am spooked by the experience.
Your advise will help me make an offer in the correct price range. The lead based paint and asbestos is something that I never thought of. That is something to keep in mind.
Does regular inspected reveal of asbestos and lead issue. Do you folks have any particular advise for a first time investor? Does ten year loan make more sense. Does it make sense to purchase a 100 year old multi unit? Finally what should be formula used for a 100 year building to make the first price. Thanks again
If i see a positive cash flow (after tax) using a internet based web site plug in numbers does it make sense to buy. No.
Do I need to see any other calculation in order to make sure it is a profitable venture? Yes. The books of the current owner - rents, leases, etc.
Does the real estate software for decision making help to decide whether to buy a rental investment property Sure if you know what you’re doing. What HELPS is having the money to put down or working things out so that the debt service is in line with you making a profit after your operating expenses and vacancy projections.
The loan rate wil probably be 6.5 percent. However the market cap at the minimum should be more than 6.5 to make sure that this is a positive venture. Forget all that mumbo jumbo. Forget the “calculator” man -
What are you putting down?
What is the monthly income - annual income?
What are the expenses - for this use figure .50 of every dollar (half) earned - include in this a vacancy rate of at least 5%.
Now what is the debt service monthly - annually?
Done.
Do you make money?
If so - depending on how much money - it is worth it to you?