270k asking, 3700 monthly gross. Would you do it?

Question

Victor Jernigan · Answer

@Stephen Adams Just quick thoughts - 8 units at $275K - about $34,500 per door with $430 rents. In Knoxville, this is rent and pricing which is typical of a one bedroom one bath property. There are several owners of such properties who attend #KnoxREIA meetings and these units are management intensive. This tenant in this type of property is usually a financially stressed individual or couple. Therefore, the units will most likely have significant deferred maintenance - from the parking lots, to flooring, to the galvanized pipes. @Phillip Denny gives solid advice on why the 1% rule is almost worthless. Most likely there are inaccurate records for the 12 months trailing rent roll and income but they will give you a guide.

Happy Investing.

David Freestate · Answer

@Stephen Adams Hi Stephen- thanks for sharing! I'm in the learning stages too, so don't pay too much credence to anything I have to say :-).

That being said, I'd be a little nervous about the vacancies- if you buy on actuals using 20% down, that's $31.2k/year gross minus $21k/yr (rough & conservative estimate using 50% rule-of-thumb on $42k gross at full occupancy, since you'll still need landscaping, garbage service, etc.) minus $10.8k/year debt (conservatively using 5%), which would put you at -$50/month right out of the gate.

I'd probably want to see a rent roll and trailing 12mo P&L- I'd also want to know how long those two units have been vacant, and would try to find what the reason is (whether you happened to catch them when 2 tenants moved out, or whether there's a bigger underlying problem). Phillip had a great point, I'd also want to break down the individual expenses to get a more confident estimate (if you haven't seen it, Brandon did a great YouTube video on estimating expenses & cash flow with BP's Rental Property Calculator, called "How I Quickly Analyze a Rental Property for Cash Flow"). Also, in Jake & Gino's first podcast, it was mentioned that some banks use $3,200 yearly expenses per unit in their underwriting; I don't know if that's still the case (if anyone knows from experience, I'd be interested to hear from you), but that would bring expenses up to $25.6k/year and put you at -$433/month starting out.

Depending on your risk tolerance, it sounds like there could be upside if you fill the vacancies, raise rents, and there aren't significant capital expenditures needed soon- I'm more risk averse though, so personally I'd probably pass in favor of something that provides the minimum return I'm looking for from month one.

Phillip Denny · Answer

Hey Stephen, good to see another person in Knoxville trying to get things moving in real estate.  Sounds like a good deal (on the surface) especially in Knoxville.  Seems like it's worth a deeper look for sure.  Being someone that enjoys playing with numbers though, I would start doing a more in depth analysis and see which numbers may have some risk involved.  I actually was running some numbers on a property the other day that seemed like a good deal based on the 1% rule ($110K duplex, $1450 per month rent with current tenants).  However, after starting to look a little closer though, the $1450 included utilities which could be $200-$300 per month easy and then upon driving by the property, it clearly needed a new roof (and who knows what else).  Very quickly started to seem like I would have to get the place for $80-90K.   If you haven't seen the calculator demos they have on here, they are pretty cool, but I love that kind of stuff.

Sean Kelly · Answer

yeah 1% rule is really only good for a QUICK gauage, like if you are thumbing through 20 properties and just trying to narrow things down.. i would suggest running it through an analysis worksheet (you can find some great ones a la google).. based on your numbers (at $3500 gross rents) thats 8.8% cap rate..nothing sexy about that. especially if these are "management intensive" units and you're picking up someone else's tenants (headaches)...

Brian Andrews · Answer

I drive past these properties every day on my way to/from work. I believe the front quad is 100% vacant (never a light on in the place). They were built in the 1940's and appear to be pretty well maintained. I think they would have the original plumbing and likely the electrical also. They also likely have 2x2's for the interior wall as many of the "temporary" housing in Oak Ridge did originally. That being said, I plan on taking a closer look at them in a few months (as I suspect they will still be on the market then).

270k asking, 3700 monthly gross. Would you do it?

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