Worth it?

I may have found a deal, but wanted some advice.

First, this would be my first venture into REI. I’ve found a property valued (according to tax records) at around $300,000. It’s approved for short sale and is listed at $212k. According to the listing agent the rental income is about $3000 a month. That seems a little high to me, so I’ll need to look at records first. But assuming $2500 in monthly rent, is it worth it?

I’d be putting about $25k down on it. The inside is in decent shape, everything is operational and it is currently occupied. The tenants are interested in staying, although the current owner told them they would have to move. There are cosmetic things that would need to be fixed if it were sold retail (scratched floors, cracked counter).

How many units are there? What are you planning to do with it. But let’s assume the $3000 income is true. 212k minus your 25k gives you a 187k loan. Assume you have a 30 y. loan @ 7%. That gives you a mo. pmt. of $1244. Using the 50/50 rule. $1500 will go to expenses. That leaves $1500 for debt service and profit. Subtract your priciple & interest. and you have $256 left for profit. That may or may not be a good profit depending on how many units. $100/unit/mo. profit minimum is a good guideline. If it’s a duplex, it appears a decent deal. But if it’s a 4 plex, not so good. You need to nail down the EXACT NUMBERS for the income. Keep the 50% for expenses since it covers it well. You can see where a change in the numbers could make a difference in a good or bad deal… Good luck.

It’s a townhouse. It’s four bedrooms, but they’ve been using the room in the basement as a (legal) 5th bedroom. There are three and a half baths. It’s a good size and the price is good because it’s a short sale.

Thanks for the feedback.
I’m interested in hearing other’s opinions too.

Does anyone have any advice on investing in a townhome like this?

What is the answer to phemboy’s question – What are you going to do with the property?

I’m hoping to purchase it, rent it out for at least a couple of years, then possibly make some improvements and sell it. But if the rental income is significant enough, I’d keep it for longer.

I’ve checked with the listing agent and although the current tenants have been told to move, they are interested in staying.

Thanks for any advice you can offer!

I think you have post the actual numbers in order to get accurate advice. When you posted the income, you went from $3000/mo. to a possible $2500/mo. You have to have the actual income VERIFIED. Then run the #'s through the models we’ve outlined. The VERIFIED numbers won’t lie. They say DEAL or NO DEAL. Good luck.

What are the terms of the existing lease? If there is an existing lease, you have to honor the terms. With the exception of a foreclosure, the tenants can not be summarily evicted just because the property is sold.

If the current tenants are paying $3000 per month, and they want to renew, then you might expect this property to continue generating $3000 per month in rental income.

The income stated by the listing agent is $3000/month. I have not verified this, but I did ask the agent to provide me with information. Can you tell me what you ask for when you verify income? I’m expecting to receive a sort of spreadsheet or expense list and revenue sheet.

The tenants have already begun moving out, but the listing agent says they are willing to stay. Other than that, I have no details on the lease yet.

Thanks for helping out.

You can ask for a Profit & Loss statement from the owner, but you’ll still have to verify the numbers. Ask for the owner’s Schedule E from their taxes. That will list what they’re claiming to the government for income and expenses. If there are existing leases, ask to see those. As Dave T said, you’ll have to honor the existing leases. You can verify property taxes with the County Assessor’s office. I would want to see the Schedule E from the past 3 years. Some people will throw tenants in a property right before they put it up for sale just so they can say it’s fully occupied. Get a few years worth of data to show how the property has really been operating.

If you will be keeping the tenants, get estoppel letters for the amount of rent, the amount of the security deposit, and the term of the lease.