There are two areas I have focused my search on in the last few months. The areas each come with their own strengths and weaknesses. I have been looking primarily at 3 family homes because they generate the best cash flow. The properties and areas I have been looking at differ as follows:
Example of Area 1 (very rough neighborhood - but good rental market b/c college town) asking price is $210,000
Gross rent $2400 per month (2 of 3 units rented)
Debt Coverage Ratio
1.30
Capitalization Rate
9.7%
Annual Cash Flow
$4,912
“Computed Internal
Rate of Return”
35.9537%
Net Monthly Cash In Pocket
$609.34
Cost per Unit
$73,333.33
Cost Per Sq Foot
$64.33
Area 2 - (less of a rental base - better area)
Purchase price of $187,000 (full asking price)
Gross rent $2300 per month (3 units rented)
Debt Coverage Ratio
1.28
Capitalization Rate
9.6%
Annual Cash Flow
$4,460
“Computed Internal
Rate of Return”
36.9225%
Net Monthly Cash In Pocket
$563.34
Cost per Unit
$70,000.00
Cost Per Sq Foot
$61.40
All other things being equal…any thoughts on what would be a better deal?
Are either near you? Are they in the same town (as you or as each other?)?
Why is one shown having a vacany and the other full? Is a vacancy a norm? Is the gross rent that you show based on 100% occupancy or on the 67% percent occupancy?
In regards to the neighborhoods, how rough is “very rough” – like YOU wouldn’t want to live there rough or “dont go there at night rough” or “make sure you’re ‘packing’ rough”…or…?
All other factors being exactly equal, I would chose the better area. I personally will not invest in a place where either me or my partner (wife) would feel threatened to go. But, that’s me…
Area 1 is appx. 15 minutes from my house
Area 2 is appx. 45 minutes from my house
The Gross Rents are based on 10% vacancy so 1 unit is estimated
In terms of rough…I am pretty much a wimp when it comes to venturing into any neighborhood that I don’t know. I woulden’t feel comfortable walking around at night…but I would not need a weapon to go into the area.
The only advantage that Area 1 has that Area 2 dosen’t is a strong college rental market…one of my biggest fears is getting a property that we cannot rent. Any thoughts on buying a property that isn’t fully rented? Am I comparing the right calcuations…I just started really working with these finance terms. I have a pretty good understanding of what these numbers mean…but just want to make sure I am doing it right.
As a random aside…how do you like working with your wife as a partner. My husband and I are just starting our adventures in REI? Any inspiration, advise or words of wisdom…