First Possible Deal

[Konrad Lightner]

Hey everyone, 

My wife and I have possible found our first investment.  We wanted to see what everyone's thought were about it.

Here are our numbers 

• duplex
• medium good neighborhood
• Property Price- $152,000
• rent income - $2,400
• down Payment - $38,000
• Cap Rate- 7.57%
• ROI - 4.35%
• 50% rule per unit - $189.49

It will need some work.  Probably around $15,000.  

Its been on the market for 41 days.  We are thinking of making an offer tomorrow for 100k but am worried that it might be too low.  What does everyone think?

[Michael Evans]

How are you calculating your Cap Rate and ROI? What is you monthly net income after expenses? An ROI of only 4.35% on a leveraged investment is not good. The whole concept behind leverage is to increase your ROI. I always use the following example:

If you have $100K to invest and you can purchase a property that has net income of $15K per year, your annual ROI is 15% ($15K/$100K). If that take $10K and borrow $90K to purchase the property, but your borrowing costs are 10% per year ($9K per year), your net income is now only $6K, but your ROI is $6K/$10K = 60%.

Because of leverage, you can use your $100K to buy 10 properties at $100K each and make $60K per year instead of only $15K.  That's the power of leverage.  You just have to be very careful when you use leverage on buy and hold property.  If you become over-leveraged and your vacancy rate increases, you can be in a situation where your rental income is insufficient to cover your loan payments and you run out of cashflow.  This is what happened to one Japanese investor in the late 1980's in Los Angeles.  He was over-leveraged and when the recession hit his commercial property vacancy rates increased and he couldn't make his mortgage payments.  He went from being a billionaire to declaring bankruptcy.

The lesson is be very careful with leverage, but it is through leverage that you can grow your money quickly.  Once you grow your money, then become more conservative.  Just my two cents.

God Bless You.