Please tell me how this deal looks

General Real Estate Investing
1

Hi, everyone. I’ve been reading through this forum everyday for quite a while now. I’ve gained a lot of knowledge from many of you. This is my first post, and I have not yet started investing in real estate yet. My plan is to buy and hold (landlord). I listed a duplex for sale below just to get a feel for how all of you would consider (or not consider) this deal. It resembles many of the other duplexes for sale in my area, so this will give me an indication of what to expect in the market I’m in. Please take a look, and please give any and all input you wish:

Both sides of this duplex are rented and have been since the current owner purchased it. $625 a month. The sellers have made improvements such as new guttering, new entry doors, and most floor coverings. Each side has 2 bedrooms, an eat in kitchen, and a garage with new doors. Each side also has a large recroom in the basement! Great location just a few blocks from the Community College. Not far at all to Village West/Legends!

Here’s the link to pictures: http://www.triplecreekrealty.com/listing/16359117-150122707/2314-n-75th-street-kansas-city-ks-66109/

Selling price: $95,000
Taxes: $2,333

I don’t have any other information such as utilities, insurance, etc. I know this is a vital part in considering whether or not to buy a property, but I’m hoping some people here can at least say it’s worth looking in to more, or ‘stay away’ based on the numbers above.

Many thanks!

2

I’m assuming that I haven’t given enough information about this property in order to receive some input as to whether or not it is a deal worth looking into…any other information I could find out and post in order to get some responses to this?

Thanks.

3

This deal doesn’t excite me, but rarely do deals this small anyway, but…

$92,000 PRICE
-$18,000 DOWN PAYMENT
=$74,000 BALANCE FINANCED (30YR, 5.5%)

$1,250 GSI (Gross Scheduled Income)
-$ 625 EXP (Expenses)
=$ 625 NOI (Net Operating Income)
-$ 420 DEBT SVC (30 YRS, 5.5%)
=$ 200 CASH FLOW (PRE-TAX)

$2,400 ANNUAL PRE-TAX CASH FLOW - ROI OF 13%
(2400/18000=13%)

ADDITIONAL PROFIT CENTERS INCLUDE DEPRECIATION AND LOAN PAY-DOWN.

Theoretically, you could accelerate the amortization to 15 years, maintain $604/mo payment, without any significant negative cash flow, and barring any major hiccups. This would become a relatively solid investment.

4

Thanks a lot for the reply, Javipa. I’ve noticed you’re one of the members who post a lot of advice here.

Yes, it’s a small deal, but since I’m just starting out, I’d like to start small and grow.

Can I ask out of curiosity, what kind of deal would excite you? You make it sound like something this small wouldn’t even interest you. Should I be looking into something more lucrative as a first investment instead of tying up working capital into something like this?

Thanks a lot!

5

Jay gave you a good quick analysis. I think the big wild card here will be the utilities situation. Your obligations as the owner can range from paying nothing to paying everything or somewhere in between. This deal may be worth checking into but the first question I would ask would be about the owner’s responsibilities regarding water, sewer, trash, electric, gas, and lawn care. The answer to that could either make or break this deal.

You have to start somewhere as a prospective landlord. In our current market, we paid more for our original first four houses here than we have for any other houses here. It wasn’t a bad deal by any means, but it got us into the market here. A lot of what happened since then was due to the housing market crash too.

I don’t like stretching small rental property deals like this one out for 30 years. If you do that, you’ll run out of financing options after awhile. I would count on 15 years.

6

Don’t get hung up on what ‘excites’ javipa…

I just made that comment to prod you to consider bigger, more profitable deals, not to goad you into doing something stupid…

The deal you presented is a good, solid, passive deal. If this is a stable neighborhood, the property is in good repair, the occupancy for the area is strong, you probably won’t find a better deal regarding both appreciation, and cash flow. Of course, that’s a gross assumption on my part, without knowing any more about your farm area.

The issue is (and this goes for most investors), what will you do after this one investment is made?

Are you “done” investing, until this deal matures, appreciates, or pays off?

In other words, how will you continue buying more $92K duplexes, and not run out of $18K down payments?

The answer to that question can come various ways. Learning how to find and negotiate ‘no down’ deals, is one way.

Another way is to focus on properties with ‘value added’ elements that would push off higher than normal profits in a short amount of time.

This would be like buying the ugliest house on the block at 20% below retail, less the costs of repairs, and then just making it habitable, and renting it out.

For example, let’s say this $92K duplex you’re analyzing was as fugly as homemade sin; the rents were only 450/side; and you could buy it for $60K; but needed to invest another $8K in rehab to get the $625 in rents and make the property worth $92K.

So, you put up a 20% down payment, or $12K, and got a 30/yr loan at 5.5%, with a $48K loan balance, and a payment of $272/mo.

You then invest another $8K in carpet/paint/cleanup and raise the rents to $625/unit, and bring the retail value to $92K.

Assuming $625 in overhead (50% of GSI), your cash flow is now $625/mo less $272/mo, or $353/mo, or $4,200/year.

So, you’ve now got $4,200 in annual cash flow, and created/captured about $24K in gross equity.

Again, that’s a $92K retail value, less $48K loan, less $12K down payment, less $8K in repairs, equals $24K in equity profit.

Adding the $4,200 in cash flow with the $24,000K in equity profit, and your total first-year profit was $28,200.

You invested $20K, and so your first-year return on investment was 140%

($20K / $28.2K = $140%)

That beats the deal you were looking at, like a red-headed step-child.

That illustrates the contrast between investing for passive appreciation and cash flow, and ‘forcing’ appreciation on an under-performing duplex.

Imagine doing that on four units, instead of a duplex… Imagine doing this on a property that is worth twice as much.

The same percentages apply to any deal, regardless of the price point. However, the DOLLARS are NOT the same. They can be HUGE.

Now, imagine a seller agreeing to finance you 100% (no down) while you turned the property around, and then refinanced it later and pulled cash out…

Then you could take that borrowed cash, and buy more under-performing duplexes, etc.

140% return excites me.

7

Well, first I would like to just get into the market with a solid deal to get my feet wet. Once I know that property is cash flowing month-to-month, I would then look for another duplex (in the $100,000 range with 20% down), then keep building my portfolio. I thank you for the tips you’ve given regarding the various ways to purchase property (i.e. no down deals), and I will definitely look into that as well.

In short, my goals are this: There is enough working capital on hand to put $18,000 down on quite a few properties (at least 10). I would like to steer clear of rehabbing for now until I get my feet wet with properties that are ‘ready to rent’ (or at least ones that don’t need too much repair…I can handle a little painting here and there). After a while, I would like to get into commercial real estate, but that will be down the road a little ways. The reason for this is solely because I want to start out small to learn the ropes of REI, and not jump into anything too big and make a very costly mistake.

I understand from what you’re saying that my proposed property above is not a bad deal for a first-time investor, but there are always better deals out there, along with ways to make deals more profitable. From what I’ve read here, it seems that at least $100 net cash flow per door is what most people expect…is this correct?

And finally, considering my short and long-term goals posted above, along with what I’m willing to do (and not do at the present time), what would your strategy be? What would you look for in a more ‘conventional’ investment if you were just starting out in real estate?

Thanks, Javipa!

8

Thanks, Justin. If all of the utilities were, in fact, the tenants responsibility, how would you rate this investment? Would it be something that catches your eye as a first-time investor, or would you look for something more lucrative as far as cash flow goes?

And I’m confused about your suggestion of financing for 15 years. Wouldn’t financing for 15 years instead of 30 give me close to a negative cash flow? I ran the numbers, and that’s what I’m getting, but perhaps I’m doing something wrong?? From what I’ve read here so far in the forum, it’s usually best to finance for 30 years, and if at all possible, use ‘extra’ cash flow (if there is any) to pay off the debt sooner. Could you please explain this to me? Or perhaps you could share a link explaining this?

Thanks, Justin!

9

My opinion is that utilities could kill this as a prospect. We pay for water/sewer/trash on a few of our properties. That’s usually not too bad unless the tenant has a leaky toilet and they don’t bother to call you to get it fixed. Most places will adjust the water bill back down to normal usage if you do a repair, but generally only one time per year.

I would not want to get myself into a situation where I was paying electric or gas for tenants. If there are no repercussions for them to have the A/C on 60 in the summer or the heat set at 90 in the winter, you’ll have huge bills from that. I would definitely make sure there are two electric meters and two gas meters there.

You’re right that one strategy is to get properties financed for 30 yrs so you can have more cash flow to work with each month. I personally don’t like dragging out payments on investment properties that long. Another thing to consider is that if you go 30 years, there will be more limitations on how many loans you can have. Last I knew, you could get up to five loans, but then for loan number six thru ten you had to have six months of cash reserves for each of those properties. I don’t deal in those loans, so investigate that for yourself.

We have what are called commercial loans (or portfolio loans) with local banks. These banks do not sell our loans to the secondary market. They hold and service the loans themselves so they keep the money coming in from those loans. The only limitation with these loans is how comfortable the bank feels with you and your investing situation. We have received much better terms on these loans as opposed to the other route, but we also have 10 year amortizations on almost every one of these loans. That means higher payments each month, but also a really good rate of equity building.

I just mentioned the shorter terms because the local banks generally aren’t going to want to finance investment properties for 30 years if they’re going to service the loan. They want to churn their money faster than that. It lowers the risk of interest rates changing if they only go out on a fixed rate for 5 years, but amortize the loan over 10 years. I didn’t want you to be shocked if you checked into financing only to find that some banks (local banks) didn’t want to come close to a 30 year amortization. That’s all.

10

Thank you for the info. And I will look into the loan limitations.

So, do you think I should keep my eyes peeled for better deals or do you feel this would be just about as solid as any deal I could expect?

11

In general, you’re going to pay more for some place in good shape. If you’re not looking to get into rehab in the beginning (and all the stuff with utilities checks out fine), this is probably a good place to start. It will give you an opportunity to get your feet wet, develop your own systems and management style, and let you see if you like it or not.

Our first deal needed a good bit of rehab, but there were some tenants already in place so it had some money coming in from the beginning so it didn’t scare me as much as a trashed out empty property.

I also have a theory that while some people (many times this will be newbies) are looking for a home run deal, I will have scored several base hits during that time. There are people who will just throw out 100 low ball offers hoping something will stick. We try to pay a pretty fair amount and then get properties up and operating making us money. If I was always trying to score the $5,000 house, we would only have a handful of properties now.

12

Again, thanks so much for the advice. I will keep all this in mind.

13

being somewhat of a novice here, The thing that stands out to me is the rec rooms, can they be converted with a closet and made into another bedroom? If so what would the rental increase be? What does the current market bring for two three bedroom duplexes verses two bedroom duplexes? That could increase your ROI and let you take advantage of a shorter term loan.

I do agree with the no money down method if possible, I have done quite a few of those, mostly damaged and undervalued properties. This is my preferred method,
I am not limited to the value of my personal resources.

a $2400 dollar return on a zero investment is $2400 any way u look at it.

Any time I can get a long term locked interest rate, that’s the key for me. Most of mine have been in house financing, 15 yr notes, with rehab moneys included in the loan. I am getting a 3 to 5 yr lock on interest rates.

Just another guys perspective. :slight_smile:
I never pay utilities.