I have found a Duplex in Tampa, FL (where I live) which consists of Two 1bed/1bath apartments. The asking price is $95k. Rents in this area are around the $600 mark. Below is a breakdown of what I have come up with:
Factoring a conservative rent of $500 a month per unit this place should cash flow $170 per month. Anything over that is great but not factored in.
The property is in a decent area that is very up and coming for young professionals. It could also be converted over to a single family home in the future for resale.
Either way I wanted to see what this community thought of the deal.
at $500 rent per unit, your break even (at best) and probably negative. You should figure at leats a couple thousand (2k) in repairs, maintenance, cleaning, etc and probably at more like 3k.
Also, if you get a 85k price, probably the highest LTV for a loan will be 90% and for a 30yr fixed that is going to put you close to $500/mn in mortgage payment.
its not the worst deal I’ve ever seen, but it does not make me leap out of my chair considering the marketplace. if you are confident that that $600 is baseline for rent, then it looks OK, but remember there is a lot of trying-to sell converted to rental out there and making tought to push up rental prices
Very good point. However, I will be doing the majority of the repairs, maintenance, and cleaning myself. I will be the landlord, management company, etc.
The other plus is that I live about 3 blocks from this property, so I could do the lawn & garden maintenance and keep that looking good throughout the year.
I am going to look at it in the next few days to figure out what needs or could be done to get the rent I desire.
Is that information obtainable through tax records?
I also have another question about financing. Exactly what type of loan would this be? Just a conventional 30yr fixed or is there a special type of loan for an investment?
Gross rents : $1,000 per month
Operating Expenses: $500 per month
NOI: $500 per month
Mortgage ($85K, 30 yr, 7.25%) $579
Monthly Cash Flow: $79 LOSS (OUCH!)
Not a good deal (unless you like to lose money). The idea that you are doing the management and maintenance does not change that. Do you work for free? I don’t.
These are your words. I was just doing the math with the information you provided. If the rents are $550 per unit per month, then your cash flow will be a $29 LOSS each month instead of a $79 LOSS (still not good).
The property currently has tenants in each apt. @ $550 a month. I could continue those leases or not. The leases are for a year and run through Oct.
You MUST continue those leases at least through October. Leases survive the change of ownership.
The mortgage would be more around $75k or 80k. How are you coming up with 7.25% interest?
The amount of the downpayment doesn’t affect the quality of the deal. Someone is paying for that downpayment, either in interest or in opportunity cost. That money is not free. I came up with 7.25% because that is the most recent rate I paid (NOO, commercial). If you have excellent credit, you might be able to do a little better if interest rates keep dropping (the Fed rate just dropped by 3/4 point).
Yes, I will work for free, if it will payoff in the long run.
That’s a big mistake. Buying a bad deal and then convincing youself that you’re making money because you’re doing everything for free is not a good business plan. All your really doing in this situation is buying yourself a job. A better plan is to buy your rentals right, so that they have real cash flow. Then, when you do the work yourself, you’ll have the cash flow from the properties AND the money you earn from your job and manager and maintenance man (I do both of these myself also).
That’s a big mistake. Buying a bad deal and then convincing youself that you’re making money because you’re doing everything for free is not a good business plan. All your really doing in this situation is buying yourself a job. A better plan is to buy your rentals right, so that they have real cash flow.
Mike is %100 on the mark…Working for free for a possible return x amount of years from now is not a good business plan at all…Buy right and make money…You have to take the annual rent roll minus,taxes,insurance,water,mortgage,%10 management,%10 vacancy,%7.5 annual repairs (clogged drains,broken window,boiler repair,hot water heater,roof etc) then figure what your cashflow is…After I see whats left I then adjust the offer price to make me %15 minimum on a all cash purchase and if that numbers works the leveraged ROI is usually somewhere in the %30+ area with %20 down…It’s crucial you account for all these expenses and never buy properties that you pay utilities,heat,electric etc…
Propertymanager (mike) is right…Listen to him or be sorry later…
Do you have money for reserves? Are utilities separate?
Break it down like this.
Gross Montly rents - $1100
Vacancy 10% - $110
Taxes- $ 210
Insurance- $ 120
Maint. $50
reserves- $100
Mortgage- $545
Private Mortgage Ins. $120 estimate.
Grand total ---------- $ -155/month.
If you pay the utilities you can deduct tose costs even further. As an investor you have to ask youself this question. What is my return on investment? Since you’re in the negative, you have a negative return. An investor will look for positive cashflow from day one. A Speculator will look for a payoff that may or may not come in the future. Which one are you? :biggrin
Homebrew, nobody who is not investing in your area can tell you whether it is a good deal or not.
How much potential does the property have? How does the price compare to properties around it?
You must find out if that is a legal 2 unit before you make an offer.
You also really must find out how much demand there is for 1 bedroom units. A one bedroom would be awfully hard to rent in my area, but each market is different.
As for working for free, sometimes that’s what you must do when you are starting out. Hard work hasn’t killed too many people, but it has sure made a lot of people prosperous.
The opportunity cost of your down payment? I don’t know about that. How much instant equity is that down payment buying for you? That instant equity is also return on your investment.
A duplex doesn’t take a commercial loan. You can get a residential loan for it. That will bbe cheaper money.
If you buy this, can you make up the difference if it doesn’t pay it’s own way? You have to know where the money is coming from and how you are going to pay for it.
As you get more involved in real estate, try to make at least a 20% down payment so you don’t have to pay PMI- that’s a big chunk and has zero benefit for you. (but you do what you have to to get started)
Should you buy it? I don’t know. I don’t know anything about your local market.
I really appreciate all of this input. It thought I had a great potential rental. It is starting to sound like I am just reaching for my first deal.
Concerning the mortgage, the property will appraise for somewhere in the neighborhood of $110k to $115k on the conservative side. With that said, should a 10k down payment plus the “equity” that is in it, I should be under the 80% LTV. Correct me if I am wrong, but that would require no PMI.
The property is 5miles to downtown, 7miles to a major University, 3.5 from night life. The area seems to be a “hot” spot for young professionals and people seeking a shorter commute. For the long haul, I feel (per what I see going on) this being a good property to hold.
With that said you all have much, much more knowledge than I. At this point should I just offer a stupidly low offer ($70k or $75k) an see if he bites, or write it off and continue my search?
Get all the actual numbers in front of you. Make sure you’re accounting for everything. If the the numbers show positive cashflow make an offer. If they don’t, lower you offer to a number that does. The numbers don’t lie. If they show you’ll make money= GOOD DEAL. If they show you’re in the negative=BAD DEAL. Don’t overcomplicate things and don’t talk yourself into or out of anything. Let the numbers tell you what to do. You have to make sure they’re the ACTUAL and CORRECT numbers. Verify EVERYTHING. Then make a decision. Good Luck.
It does not work that way. The LTV is calculated based upon price for purchase money loans. For refi’s it based upon apprasials
Beside, the apprasiers usually just “hit the mark” (i.e. it will come in just over purchase price).
I would aks the seller for his past 2 yr of operating expenses from his Sch E. You may or may not get them.
In the end, you have to define your objective. If you are looking for immediate cash flow producing income that requires no effort, this is the wrong property. As a long term hold given what you said about the desirability of the area, it might be the right deal for you. Rental properties come in all shapes and size which equate to a spectrum of a investment returns ranging from pure appreciation (i.e. you are huge cash negative) to heavy positive cash flow (but appreciation is usually very minimal if negative if you factor in inflation). There are exception to this, but in general it seem to be true across the country from my experience of buying and viewing properties in multiple states. This property appears that to fall in the middle which means it can be breakeven or a little positive with some effort on yoru part and appears to a have some reasonable potential for equity appreciation.