I think I found a deal! Now what?

Question

Okay BP friends - I need your help...I think I stumbled upon a great opportunity but I would like to hear everyone's opinion and perhaps whether there is anything I am missing.This is a 4 unit building consisting of studio apartments at 336 sf per apartment (basically shoeboxes). It is walking distance to a university which makes me nervous since I remember what I did to my college apartment (not at all proud of it but this was 10 years ago).All 4 units are occupied so I don't think I need to do repairs and I won't need to look for tenants. They are renting at $450-$475 each for a total of $1,875 per month, although I think I could raise the rent and the contracts are almost up.HOA fees are $1,152 per month which sounds extraordinarily high to me but it says that outside repairs (such as the roof) are covered. Real Estate taxes are $50 per month (is this the same as property tax)? Total expenses listed are at $14,424 annually with $22,500 in income for a net of $8,076, $673 monthly.The property is listed at $89,000. I could probably raise the money for a $10,000 down payment as a loan from my 401(k) which would eat up $200 per month from cash flow since I have to pay it back. Also, I would need to finance the remaining $79,000 and there goes my remaining cash flow. Still, if I were to break even to eventually own the property flat out or raise the rent such that I am producing monthly cash flow, does it sound like a good deal?Or perhaps there are other options I am not considering that would not kill my cash flow.I appreciate any advice, guidance, suggestions or warnings anyone can offer. I'm excited but I don't want to do anything stupid.Thanks everyone!

Mark Elliott · Answer

andrew. NO, i would not make this deal. did you get into RE to break even? think about the HOA fees. are you willing to hand over 2-1/2 units rents for each month just to have someone guarantee to fix the roof or siding? these are things that you can do yourself and probably would not need much attention most of the year anyway. so, you are throwing money away for nothing every month. have one of those units go vacant for a month and you loose all of your profit, if there even is one anyway. if there is not profit with it fully occupied, you are going to be shelling out money from your own pocket if one goes vacant. i wouldn't walk away from this deal......... i would run. there are better deals out there.

Andrew Bondarchuk · Answer

@Tyler Flagg I forgot to mention also that the HOA fee is regrettably not a typo. We looked at other properties in the same area to verify this. I bet the members of the board are driving Lambourghinis.

Andrew Bondarchuk · Answer

Yes, definitely not proud of it. It was a second floor apartment and we kept a keg in the corner of the living room and kept changing it out whenever it emptied so needless to say there was a lot of woodrot to replace. One wall of the apartment was basically a dart board. We drew the target on the wall and everything. We caused roughly $8k in damage but the good news is the landlord took us to court and he was awarded all the damages. At least he wasn't out of pocket - he was even paid for the legal expenses. He also let us finish our lease out because we were paying rent so we didn't end up with an eviction on our records. Great guy! The landlord/tenant threads are some of my favorites and it doesn't look like this is the usual outcome, unfortunately.

Byron Bohlsen · Answer

That HOA fee is outrageous. The HOA fee on my condo is 247, and guess what? Outside is covered. What about insurance? HOA don't normally cover inside the unit and you should at least have liability.Maybe if you can somehow get rid of the HOA or got it for 20k lol.

Jane A. · Answer

Andrew Bondarchuk For this money you would better find SFR with no HOA fees and making some money plus appreciation Find wholesalers in your area

Kyle Gregg · Answer

Im in the rehab phase of a 203k. let me know if you have any questions.3.5% is the MINIMUM contribution required to close a 203k, but isnt at all what you actually NEED to close. You have to figure at least another 6% of the total loan amount for closing costs. Dont let people fool you into thinking that 3.5% is all you need!

Brent Coombs · Answer

@Andrew Bondarchuk, it is probably just as well that you remember your own student indiscretions when contemplating repair/maintenance costs for this one. And it is also likely that your VACANCY costs will be higher than you might have allowed for?Taking on a project like this that MIGHT eventually give you a positive cash flow in the sweet bye and bye (but continuously drains my wallet for goodness knows how long in the meantime) does not sound like any sort of a deal to me. Just my 2c. All the best...

Byron Bohlsen · Answer

Offer 15 then turn around and sell to a frat ?

Andrew Bondarchuk · Answer

I am definitely running away from this deal. I didn't account for vacancy - if anything I would lose money on this one. Thanks again to everyone for the advice. I'll keep looking! :)

Barbara G. · Answer

Total rent = 475*4*12 = 22800 Mortgage (96.5% of 89000 4% interest rate) = 410*12 = 4920HOA = 1152*12 = 13824Taxes = 50 * 12 = 600Expenses so far = 19344You are still missing PMI (if you use FHA loan), Vacancy, Maintenance and repair, property management from your expenses. I don't see how this could be a deal. Am I missing something here?--------------------------------------------------------------------22,800 - 19,344 = $3,456Repair and Maintance has to be at least -$1,200?Leaving you + $2,256Vacancy -$465 = +$1,791 or 2 months minus another -$465 = + $1,327How old is the property and what are the capital improvements costs?So unless you can get this for less money and unless you can raise the rents soon. If you raise it $200 a month that would give you $3,520 a year cash flow and if you raise it another $50 a month = +$4,120 a year positive cash flow These number are without figuring in a PM. this is also without PMI costs. What would the PMI cost over the 12 months?Well you ran the numbers here so your next proposed deal will be much esier to figure