Need Feedback - Deal / Offer

General Real Estate Investing
1

First, thanks to everyone who has either posted questions or answers to these boards, I have learned sooo much in the past couple of months. I’m getting ready to make an offer (a bit paralyzed by analysis though!) – I want to jump, but don’t want to overlook anything obvious that will cost me greatly. Here’s my deal:

Triplex in the suburbs of Philly, about 30 min from my house. Good working-class area, mostly SFH. Rents seem to be consistent with the market. All are 1 bedrooms of varying unit size. It is currently fully occupied, although the largest unit is working on an eviction. With this tenant out, we would make repairs to this unit (update kitchen, holes in walls, some outside siding replacement, deck awning replaced, etc – nothing structural.).

Sellers are motivated. Partnership between two friends. One needs the cash for another venture and the other one has some personal problems (got this info from the RE agent) – both decided it’s best to get out.

Our goals – hold long term and invest for cash flow.

Ask Price $175k
Optimal Strike price $160k

Numbers based on $160k:

40,000 Down Payment (25%)
120,000 Amount Financed
8,000 Closing costs (5%)
15,000 Rehab – probably less than this, but wanted to be conservative
63,000 Initial Investment (we have the cash for this)

120,000 @ 5.5% for 30 yrs = $680 (we have FICO of 810, so may get better rate)

23,700 Gross Rents (fully rented)
2,370 minus 10% vacancy (will have vacancy from start, the other 2 units have 1 yr leases)

$21,330 GOI

Expenses:
RE Taxes 2,300
Prop Ins 680
R&M 600 (estimated)
Elec 320
Permits 140 (estimated)
Adv 300 (estimated)
Reserves 430 (~2%)
Total OE 4770

NOI $16,560
Annual Debt Service = $8,160
Cash Flow before Taxes = $8,384

On our initial investment of $63k that’s only ~13% which isn’t great, but the cashflow is good and it gets us in the game and some experience. We make good money and have reserves if needed, and we built our own house so we’re quite handy (but agreed that we would try and contract out when possible). We do plan to manage it ourselves. That’s all the info I could think of…. Is there anything we’re forgetting?

Here would be my initial offer:

$154,000
No finance contingency – have pre-approval letter from bank already
Contingency Clauses
– 15 day inspection and financial due diligence
– non-paying tenant has to be gone from premises (don’t want to deal with eviction process right off the bat!)
Close 45 days after 15 day inspection & due diligence

Thoughts? Questions?

2

Welcome Sindy!
Here are some of my thouhts for you. First off, your gross potential rent is right at $2000/mo. I would like to see that number closer to $3000/mo if you’re going to put out about $150k.

Your electric estimate is less than $30/mo. Is this the cost for a streetlight only? What electric are we talking about?
Do you have to pay water since this is a triplex?
What about trash removal? Do you pay this?
Is there a yard to care for and do you pay for that?

Is your $680/yr insurance number an actual quote for this building or are you just estimating? That seems low for a $160k property.

Your repair and maintenance estimate seems way low. A couple calls to a plumber will take that out. I know you said you’re pretty handy, but you’re not even allowing $230 per year for each unit for R&M. One stove or refrigerator going out will exceed this amount per unit.

Are you sure you can get 30 yrs amortization on this?

I think you’ll find that at the end of a year, you’re not going to have that $8,384 cash flow you’re estimating for this deal. Just trying to be realistic and see if you’ve answered these questions for yourself prior to putting it under contract.

3

Sindy,
I agree with Justin, the expenses seem too low. Our insurance rates here would be about $850-$1000 for 3 units with that price range.

You seem really qualified to get started in investing. But how many buildings have you looked at? Are you pursuing the hunt on your own (see posts by FDJake on how to find bargains) and following up “For Sale By Owner” ads on your own?

If you make a definite plan to spend the next 3-6 months REALLY LOOKING at say 50 properties, you will find a bargain. I guarantee it. It will jump right out at you and you will know how to analyze the numbers. Talk to those private owners yourself.

Realtors are a help, but they will be pushing you to sign that contract. That is their job. You will MAKE YOUR MONEY WHEN YOU BUY, if you slow down and do it right. Become the expert on starter investment properties in your area. Before you pull the trigger.

Good luck, and let us know how it goes.

Furnishedowner

4

You’re right, the expenses do look a little suspect… they are only about 20% of GOI (darn, I should of seen that earlier… will add that as a condition to flag in my spreadsheet). – I’ll ask for a more detailed breakdwn from the agent.

LL pays SWT, TT pays all other util and takes care of yard (actually, they haven’t taken care of it at all - it’s a mess!). The LL elec is for a single light in the entry way.

I’m meeting in person with my banker today, so I’ll verify the 30 yr amort.
The Insur was an est based on what I saw on other properties, but I’m putting a call into my insur agent today to get a better sense of what it would need to be.

Thanks very much for taking your time to evaluate this, this is exactly the challenging of the numbers that I need. Stay tuned!

5

@furnishedowner—

You’re right, I definitely need to change my strategy on how I find properties (this has been the hardest part for me). I feel I have a pretty good handle on what it will take to be a LL and what the numbers SHOULD look like to be profitable (okay, well I’m still learnig here).

I have vacation coming up and I think it will be a good time to put together a good plan on how to recruit for properties (Situational: divorce, death, LL with lots of evicts, etc.), networking, and just getting toknow my ‘farm area’ better. I’ll take a look at FDJake’s postings (thanks!). I’ve come to the conclusion that while looking at the MLS is convenient (provides a good learning ground, too), the numbers RARELY work and I don’t want to try to force them to work.