There is a triplex for sale at 180k that grosses $2200 a month.
I would pay at most 140k if I ignored the guidlines given to me here.
The property tax would be about $300 a month.
Would anyone here pay that much for that much monthly gross rent?
Is this not a deal at all?
Stoopitnewb,
The asking price should have absolutely nothing to do with the price that you would pay for a property. Operating rental properties is ALL ABOUT THE NUMBERS.
In this case, the gross is $2,200 per month. Real world operating expenses would be about $1,100. You’ll have $1,100 left over for the mortgage and any profit. The mortgage payment would be $1,050 (30 year, 8.25%, $140,000), leaving a whopping $50 per month positive cash flow. That’s about $16 per unit per month profit. Is that a good deal??? NOT TO ME!
Mike
I understand the formula.
I talked to a local investor/realtor and he told me I would price myself out of the market if I follwed these guidlines.
How can these numbers be accurate when the same house would cost 250k with the same gross rent somewhere else?
Do you really find multi family properties and pay 70% of what your lender appraises it for?
Future Guru,
So basically what you’re saying is that you are desperate enough to buy something that you will buy a property that does not make money. Contrary to the guru nonsense, everything does not work all of the time in every market. However, in every market the vast majority of rental properties will be sold to “investors” at near retail prices. It is also true that the vast majority of new investors will fail. Do you think that there is a correlation there? The number one reason that the vast majority of new investors and other new businesses fail is the lack of cash flow.
In my market, the vast majority of duplexes sell for $80K to $90K. I bought my last duplex for $11,000 and put about $22,000 into the rehab (I forget the exact number for the rehab, but that’s close). Therefore, I have $33,000 in an $80K duplex that has gross rents of $900. The vast majority of “investors” pay $80K for an $80K duplex and go out of business in a short period of time because they don’t have the cash flow.
Good Luck,
Mike
P.S. I’d find a new realtor!
I’m not desperate, I have no intention on buying this property. I don’t have the cash reserves to take on any risk right now. I just ask for a better understanding.
The realtor is not my realtor. I seen him rehabbing many properties so I walked up to him and started talking to him.
In my market houses listed for 100-110k gross $1500. That sounds good when compared to your market.
Would you even make an offer for 70% on the triplex I mentioned or do you avoid properties listed at retail?
Future Guru,
You know that houses in your target area will rent for $1,500. Therefore, you need to buy these properties so that you have no more than $70K to $75K in them. Would I offer someone $70K for their house if they had it listed for $100? No, because there is a low probability that they will take it. What I would do is find someone who is desperate to sell. Someone who will do whatever it takes to get rid of their problem. Disgruntled landlords are an excellent source of deals for apartment buildings. Vacant houses, estate sales, REOs, people with more than one house, out-of-town owners, houses on the market more than 120 days, etc are good sources of owners who may be desperate to sell.
Mike
These houses have been on the market for 6 months. Where can I locate disgruntled landlords? REI clubs? I figured they are the ones listing them.
Thanks for your patience with my endless questioning.
Yes, REIA’s are an excellent source of disgruntled landlords. However, these deals can show up anywhere. The key is that YOU KNOW what you are looking for. You are looking for properties that will gross $1,500 and that will cost (purchase price + rehab) no more than $75K. Find a HUNGRY realtor. They will hunt these deals down for you. You can even run a small ad in the newspaper. Most of these deals need rehab, so be prepared for a little work.
Good deals are not hard to find, but you can’t turn a retail deal into a REAL DEAL. Disgruntled landlords are everywhere. The vast majority of newbies fail in a short period of time, and many of these will become desperate to get rid of their problem.
Mike
property manager is right. DOnt be in a hurry to buy something that will lose money for you. Take your time and buy something that will. Afterall thats the name of the game. Unless you have a ton of money to throw around for down payments.
Sorry to take this in a different direction but… what is the
70% rule & 1/2 gross rental rule for cash flow
70% rule- don’t buy a property for more than 70% of the market value. This includes rehab, closing, and cost of the property.
1/2 gross rent rule-take the gross rent from your rental and divide it in half. Subtract your P&I from half of the gross rent, the balance is your cash flow
1500 gross rent/2=750
750-500 P&I=250 cash flow
Thanks, Is P&I principal and interest?
Yes
Ok, I’m curious as to how you found this particular property for such a huge discount – what were the specifics with this deal? What situation was the owner in for him/her to accept such low price?
Thanks
Keep in mind when you here all of these rules they dont hold true in everymarket sure numbers dont lie, but their are variables to consider other than just cashflow, things like equity growth which the “experts” fail to mention
If you are properly leveraging yourself the equity growth that you give up in order to find a property with cashflow can be quite substantial.
Dont use ANY certain formula because they wont make sense in every market.
As far as purchasing homes at 70% of value, it can be done in every market, but the frequency that it can be done varies widely depending on your real estate market. If the markets great and there are alot of investors property values will many times be dictated by the person who is willing to pay the most. So a few idiots with money can make it very difficult to find these great deals, because they are out looking for the same properties that you are, and if they are willing to pay 80% of value then it will be difficult to find alot at 70%. So eventually you need to ask yourself is it better to buy 1 property in 6 months at ltv, or 4 properties in 6 months at 80 ltv, only you can really answer that question
Eric Medemar
Beem,
My realtor found this deal for me. This was a REO that was in HORRIBLE condition. The doors were destroyed; the windows were all broken out; the furnaces were missing; there was about one foot of disgusting trash everywhere (and I do mean everywhere). The water had been shut off for a long time, and there were several buckets of human feces - YUK! Even so, the bank wanted some ridiculous amount for the property. I offered $11,000. They laughed at me. A couple of months later, I offered $11,000 again. They laughed at me again, but lowered their price a little. This went on for about a year. Then, they finally called me and asked if I would still pay $11,000 for the house. I did.
That’s how I got this house. Patience is often the key in dealing with REOs.
BTW, the commission on $11,000 is just about nothing. I gave her a nice bonus for finding this property for me.
Mike
sweet
You have to take your time to find deals. Remember it is not how fast you run, its how steady you can keep going. A steady pace will win the race in the long run…
I just signed a contract on a condo in Fl… bank owned property…
Asking 694K, Appraised at 910K, I made 10 offers over a 3 month period to the bank and finally they settles at 590K plus 3% closing cost, so that is 65cents on the dollar. Plan to spend about 30K in rehabbing and my appraiser says it should be worth aboout 1mil- 1.2mil after I update the 2 1/2 baths, rip off wallpaper and paint and lay nice marble throughout condo. Kitchen is already done and perfect.
Plan to rehab and put it on marker for fast sale at 850K for a fast 200K profit…
So the deals are there, just takes time, and I live in one of the most overpriced markets in the country, SoFL
Hey yrush good luck with your investing just be careful with those flips A lot of people are getting into trouble recently with them.
How did you obtain financing? Hard money? Or do you have the case?