Help newbie evaluate prop -- what I am doing wrong

General Real Estate Investing
1

I looked at a duplex listed at 198000. Good condition and excellent location

Fully occupied at $1055 per unit per month. Here are my calculations.

Gross Rent 25320
Vacany -2520
Net Rent 22680
Taxes -4400
Insurance -1300
Maintenance -1200 (50/unit/month)
Net income 15900

Debt service 13416 (80% financed at 7.75% over 30 years)
Net Cash Flow 2486. And this doesn’t include water and yard maintenance costs.

That is barely $100 month per unit. Doesn’t seem like a good deal based on the expert advise posted here (propmgr’s rules of thumb that net should 1/3 of of PI and rent collected should be 1.5-2% of price). I am at my wits end as to where to find such properties. They certainly don’t seem to exist in the MLS listing. None of the properties I reviewed in the DFW area seem to list at a price where gross rents are 1.5-2%. Please advise what I am doing wrong or where I need to look-- I am sure there must be a lot I am doing wrong or not doing from lack of experience)

2

This does not look like a good deal to me. Are the current rents market rent? If not, you could raise them.

Or just offer a lower price. This may sit on the market for a long time, if buyers are doing their math. Then the seller will probably be more agreeable to accepting a lower offer.

Also note that you are looking at retail price on this building. You might need to find those properties that need work, have current lower than market rents and a motivated seller. Keeping in mind that those properties might not even be on the market :slight_smile:

3

Lori K, thanks for the response. Rents are at market and sales comps in the area are also in line. Actually, I found out that the property went into contract today (had multiple offers too). The part that drives me crazy is that the rest of the listed properties seemed like much worse deals than this one and they are going under contract too (this was one possiblity). So obviously I am looking in the wrong place (MLS listings, Loopnet, etc.). A couple of follow up questions…

What would you offer on this property?

Where to find the deals that meet the parameters laid out on this forum (which make sense).

I am really at a loss as to where to focus my efforts on finding properties and would appreciate any input (more than 1 unit, not SFR because those deals in this area seem even worse)

Thanks in advance

4

Most people will ask as high as they can on their properties, but that does not mean thats what you should offer. Do your math and then make an offer. They can accept it, counteroffer, or reject it. Just because it went under contract does not mean it will be sold for the asking price :slight_smile:

5

fadiz – In this case I know the offers and it will go for asking price or 2-3K less if there is any repairs found to be needed. There were 2 on sale, one already sold for 200K. What would you offer based on the math I spelled out?

6

Remember that most new REI investors fail. Just because someone else paid that price doesn’t mean that you should or they will make money doing it. There seems to be a growing attitude that zero cash flow is ok and you’ll make it up on appreciation.

7

The cap rate on this property is 8% which is not bad. If the location and the property condition is as good as you say it is, then it would be a good long term investment. The higher the risk, the higher the cap rate you want to look for (which would result in lower price). The higher the cap rate, the more money you will make as well.

My comment was not wheather the property was worth it or not, I was just saying that people ask for market price but would be willing to take less.

Cap Rate = NOI/Price

8

What would you offer on this property?

Hard to say, not knowing your market. Knowing the market is just one part of knowing what to offer. A duplex counts as residential housing (4 family and under) so I don’t use a cap rate to determine offer but rather the same formula I’d use to purchase a SFR, which is 70% of ARV minus repairs, or in this case $140K. The main problem is not the offer (or lack thereof), but rather, that you’re looking for properties and not for motivated sellers.

Where to find the deals that meet the parameters laid out on this forum (which make sense). There have been books, courses, seminars, and boot camps detailing the answer to this very question, so it’s not feasible to give you a more detailed answer than to simply say, find the motivated seller. You don’t look for a “deal.” You need to look for a seller to create a deal.

Raj

9

Just a few ideas to help you out on this one. First you must realize that the biggest lesson to learn is to know when to say “NO” and walk away. However, there is a couple things you can do to try to get this deal done, and dial it into a profit making business decision.

First thing is to find out area rental averages for like kind income properties.

Second, take the total rents and divide them by .75 and base that figure on your bottom line offer. IF you are not at least a little embarrassed to make an offer, your probably paying too much for it!

You can work on a counter offer and apply a five to ten stratagy. For every five dollars, you go up, be sure the seller comes down ten dollars. And dont force a division of middle ground.

Next, another financing method is to get the seller to carry a 8 percent 2nd mtg. Interest only for 15 yrs. and dial the numbers in that way.

Then go back to the seller and refer him/her to a note buyer to sell the second market. NEgotiate an interest rate reduction with the note buyer you refer to the seller, whereby you can cut another .75% off the balance.

You can also negotiate the seller to carry a 2nd mtg. with staggered balloon payments for reduction of mo. interest rate charges. Ie. if interest only payments are 1200.00 then negotiate a $750.00 mo installment and balloon the ballance at some other time, say five yrs.

Another thing is to try a Lease Option stratagy, where by you have two yrs to exercise, and use a portion of the longer living leases advances, plus a percentage of first months lease payments from tenants, towards paying the initial lease/option payment.

Do upgrades on the building(s) and the landscaping and re-appraise the building for more equity, then reifnance the deal to pay off the underlying loans. Make the 2nd note holder either sell his note, or keep them as a deferment to maintain less than a 95cltv.

Increase rents, on new rental clients. Call a meeting of the tenants and get their feedback. ask them if there was a way to improve the building or services, what whould they like to see? Tell them that by you agreeing to do those improvements, you will need to raise rents by say $20.00 or $50.00 and ask them if that is agreeable to them… If it is that important to them, and will guarantee their renewal, great… if not, dont do the improvements. In most cases, they will be willing to pay more, for you to work on improvements and increasing the value of the property on their backs… Also, if you use this, get them to agree to a new lease, with no qualifying to include the rental increase.

See if those numbers will bring you in line.

GBrents.

10

Raj, such profound words from you for a newbie like me, motivated seller NOT properties, motivated seller NOT the deal. Thanks so much for the answers to my specific questions. You have helped provide the right perspective for me – I will spend more time on learning in the areas you mentioned. Thanks again.

Grents – Thanks to you too for the detailed ideas. Some of those I understand but others are too new for me to really grasp :-[. I’m sure I’ll catch on to those with some reading 8)