Is this a DEAL?

Question

I am looking to purchase at least two cash flowing rentals for long term holding by June of this year. However, I live abroad and thus have no 'local' market or team in place. This has led me to turn key investments. I ran across this one and wanted to know what the BP community thinks about it as an exercise for being able to analyze 'deals' like this moving forward.

* * *

A triplex property in Philadelphia

Purchase price: $127,500 (not a foreclosure, normal sale)

Property info: 3 bedroom, 3 bathroom, 2,2790 square feet (3 floors, triplex)

INCOME

Monthly rent collected: $1,950

Guaranteed for year 1. One year home warranty (could someone explain what that might mean?). A 15 year roof warranty.

EXPENSES

Monthly expenses

Property taxes: $105

Insurance: $80

Property management fees: $195

Monthly expenses (conservatively estimated)

Vacancy (7%): $137

Repairs (5%): $98

Total Monthly Expenses- $614

Net Income = Income – Expenses = $1336

This makes the cap rate a stunning 12.5% and if I were to put down a normal 20% down payment a COC return of 62%!!

Not in this world right?

So I applied the 60% rule (the 50% rule with my twist for turn keys as I want to make sure I do not get burned).

$1,950 * .6 = $1,170

Leaving $780 for mortgage payments. Assuming a $500 mortgage this would give a solid 13% COC return.

* * *

What say you? What am I missing?

If the fear is not being able rent again at those prices, how did the PM get those leases in the first place?

Looking forward to the feedback!

Mike D'Arrigo · Answer

@Jonny Lambert Before even looking at numbers, you need to know if this is a good market and a good neighborhood, especially since you are out of the country. What area of Philadelphia is this in? There's some real bad areas. Do you know anything about the neighborhood and street? Once you determine if this is a good area to invest, you can look at the numbers. I don't think your numbers are conservative at all. I can guarantee that your vacancy is going to be a lot higher than 7% on a triplex. Multifamily renters are very transient. You're maintenance/repairs are going to be a lot higher than 5%. Since it's a triplex, you have 3 of everything to break. That means furnaces, hot water heaters. My recommendation is to find out as much as you can about the area. Call an independent property manager and get their opinion. If you decide it's a good area, go back and review your numbers. I think they're too low.

Good luck,

Mike

Good luck,

Mike

Mike D'Arrigo · Answer

@Jonny Lambert I completely disagree that the macro market is more important than the micro market. Both are very important. There are good areas in bad markets and there are bad areas in good markets. You can get burned in either. It's important to be in a market with a healthy economy but beyond that, you don't want to be in a bad neighborhood. That is where your cash flow will evaporate--especially on a multi family property. It's true that value on income properties should be based on cash flow which is all the more reason you need to be careful of where you buy. How much is a property worth that doesn't have any cash flow or negative cash flow and that's what you'll have if it's not in the right area. The fact that these numbers came from the company selling it would make me real concerned about them. In my opinion, these numbers are way understated which would make me skeptical of the seller. My advice is to get to know the area extremely well first. As I said in my original response, talk to an independent property manager--NOT theirs. Ask them what challenges they think they would have in managing it and what kind of tenant they could get. Learn everything you can and then tread very carefully!

Account Closed · Answer

1.  You have no idea how a cap rate is used.

2.  A cap rate is generally not used until you get to at least 10 units, varies to some degree by market.

3.  There is no cap rate on this property until you buy at the guesstimated STUNNING 12.5% and then you may well find out the market cap rate WAS 18.5% and you'll have every other investor laughing their asses off until they realize this will encourage other sellers to hold out until your twin comes along.

4.  A GRM would be more appropriate and much easier to use.  Gross Rent Multiplier.  Your gross rents are $23,400 divided into your purchase price of $127,500 is a GRM of 5.4.  You should ONLY compare that to similar properties in similar NBHS's.   A GRM of 10 is a generic Midwest number where in SF/Hawaii it can be in the teens, twenties and up.  It is much easier to find correct information on rents and you can find sales prices so as long as you are comparing similar properties it is harder for someone to pull the wool over your eyes.

Account Closed · Answer

@Jonny Lambert I think most international investors have no idea about buying US rentals.  It's not that easy to manage and not hands off as you imagine. I own properties out of state and find I need to go there at least 2 times per year. For me it's a 4 hour flight and a weekend. What would it take you? And you should never invest in a city you don't know and have never visited. Secondly, where do you plan to get the mortgage? US banks don't lend to foreigners and a few private lenders may but at very high rates.  I think the only way for you to invest in US rentals is with a local partner if you can find one. Otherwise, you will lose money for sure.

Aaron Mazzrillo · Answer

Guaranteed rent for 1 year? By who?? Someone is selling you an investment property, as in real estate, and telling you they are going to guarantee you the first year's rent? That sounds like the price of that "investment" as been increased, at a minimum, to cover the potential margin of loss. The only time I've ever seen sellers of so called investment real estate offer guaranteed rent was when the only thing they were actually selling you, as Tommy Boy said, is a guaranteed P.O.S.

Jonny Lambert · Answer

@Mike D'Arrigo Great advice about first defining if the area is go or no. However, I believe I heard in a BP podcast that the macro picture of a market is more important that the micro picture for investment properties as they are valued on income and not comps. Is there no opportunity to be had in a less than ideal area?

The first set of numbers are not my numbers. They are the numbers listed with the 'deal.'

The second set of numbers is where I used 60% of income to cover expenses  thus being more conservative than the 50% rule I have learned here on BP.

Is this a DEAL?

Most Popular Reply