Or at least fair deal, I dont want to own the property for more than 4 years.
Purchase Price 245,000
Loan amt - 215,000.
8 units, rent roll = 3040 per month.(390 per unit per month) ( I know it doesnt follow the 2% rule but the exception is that the maintenance is very low)
Gross Income per year - 36,960
Student community so expectation is very less and easily rentable , and is 100% occupied, just so long as water and power are available. Only water is paid by owner.
Expenses past 2 years roughly 11,500 per year.
Net Income - 25000
Debt service - 19000 (215k @ 8% 30 yr fixed)
Cash flow = 6000 per year i.e. 500.
After 4 years 75000 would have been paid back thus the loan amt is now 140,000.
Even if I sell it for the cost price 245,000 i still make 105,000.
I will focus my comments on your loan assumptions and leave the NOI calculations to others on the forum sure to chime in. First, the $19,000/yr debt service is not 100% principal repayment. Most of your payment goes to interest on the outstanding debt. For example, after four years you will have made payments of about $75,000 on your mortgage, of that only about $8,000 is principal reduction with the remaining $67,000 going towards interest on the debt. Thus after four years your loan balance is $207,000, not the $140,000 you assume in your analysis.
The expense numbers you listed are garbage (in my opinion). Students are VERY hard on rentals. Why would you want to hold a rental for 4 years? That doesn’t make much sense to me.
The assumption was that since students live cheap, they’ll not expect too many extravagances just basic accomodations and I can save routine trips to Lowes, plus in this area which is very close to a major university housing is somewhat in demand.I agree theyre hard on properties though, just as long as they dont burn down the place.
The 4year was based on my incorrect assumption that the loan amt would be sufficiently paid back, primarily to use the equity to take a bigger loan for a more lucrative property.
I thnink you better take a HARD look at the maintenance costs. If they are low and it’s rented by mostly students, there’s something rotten in Denmark! Have a look at the owner’s deductions listed on their tax returns. They may be less likely to lie to Uncle Sam regarding expenses. When I see low maitnenance, I see it as deferred maintenance.
I have the expense reports for the past 2 years and am seeing 10,500 and 11,500 and this owner has owned it for over 14 years, so I will maybe have to see more years worth of maintenance.
Can anyone tell me if sales deeds are available for the public to see? If so where can I find them? The CAD doesn’t have more than 6 years worth of history.
Also will appreciate if someone can valuate this property based on Income method, maybe my numbers are messed up. thanks
Past operating expenses are not indicative of future operating expenses. For example, what if a furnace goes bad the first day you own the property? (although not technically an operating expense) those figures cannot be calculated. Also, the current owner has no motivation to provide real operating expense numbers. Did he include gas money to drive to and from the property? Attorney fees? Evictions? The list goes on and on. That’s where the 2% rule came from…because you cannot anticipate these expenses, it’s a long term average.
I would recommend finding a property that will cashflow, there’s plenty out there now.