Is this a good deal?

Question

Hi guys im new on Bigger Pockets, Im working on a deal and just got loan approval so before I went off and put this property under contract, I wanted your ideas. Ok so here is the deal. 2 duplexes of 1/1's (4 units) also has enough land with the property to build an additional 2 duplexes but that wont be for a while. The property is for sale for 50,000 and I will be financing. The units have not been section 8 approved yet but realtor says they can be. Current owner is renting units for 1. $295 2. $295 3. $375 4. $395 for a total monthly gross of $1,360 and no utilities are paid by owner. They are even admitting that those rents are low and new owner should up the rent. my realtor says similar 1/1's in the area are renting for $500, so there's an eventual upside. Everytime i put all the numbers in, im getting a cash on cash ROI north of 30% which seems too good to be true and thats even including money going into an account for maintenance, vacancy, and capital exp., am i doing something wrong or is this really a good deal?

Property taxes= 1,000 per year

Insurance= 1,300 per year

Property management = 10% per month

Thanks,

Daniel

Property taxes= 1,000 per year

Insurance= 1,300 per year

Property management = 10% per month

Thanks,

Daniel

Daniel Cedre · Answer

@Nick G. Thanks for the Info I will definitely look it up and I didn't even think about replacing with my own tenants.  I like that idea! These are the numbers after doubling vacancy, tripling maintenance, and doubling CapEx.

Monthly Income:$1,360.00

Monthly Expenses:$1,121.38

Monthly Cashflow:$238.62

Pro Forma Cap Rate:14.09%

NOI:$7,044.80

Total Cash Needed:$11,000.00

Cash on Cash ROI:26.03%

Purchase Cap Rate:14.09%

Nick G. · Answer

Hey @Daniel Cedre. Not enough info here to give you a firm answer, but here are some quick thoughts.

1. Trust but verify. Whatever the listing agent tells you, you may be able to trust... but you need to verify 100% of it, just to make sure. That goes for Section 8 eligibility and anything else you're told.

2. Your numbers should be taken with a grain of salt until you've personally inspected each and every unit in the purchase thoroughly.

3. 1-bedrooms usually have much higher turnover than any other bedroom count, so make sure your area has enough population growth to sustain that demand for many years to come.

4. Dovetailing on the prior point, whatever your expense numbers are that you're using, you should double them - especially vacancy. See if the property still performs without hemorrhaging you money. If it looks okay, you can probably feel good about what might happen in a downturn. At a minimum, you should probably be very generous with your estimates for vacancy and repairs - your CapEx allotment will of course depend on the property's condition.

On the surface, the numbers don't look bad, but I don't know your area, the crime rate, the neighborhood quality, the economic trends of the area, etc.

However, I can tell you this - assuming you're buying it with 20% down, there are worse ways to risk $10,000-$30,000. In my area, what you're buying would likely cost me nearly $1,000,000 and 10-20x more out of pocket!

Update after reading your later posts - Remember how I talked about population growth? Well you should really look into that explosion you're having - look up North Dakota's oil industry from a few years back to know what I mean. Sometimes, what comes quickly can leave just as quickly.

I'd also probably be replacing all of the current tenants with your own, unless they're willing to stay on at the new higher rents - but even then, I never trust other people's tenant screening.

Daniel Cedre · Answer

Our market is currently exploding because of new manufacturing jobs opening up, we have had an influx in our city of more than 30,000 people, this was a 70,000 pop city and its now well over 100,000 and increasing. Depending on what side of town some 1/1's are going for over 900 but in this area my market research is showing 500-600. Also, if i go with section 8 they have their max rents for my area set at 630 per month for a 1/1.

Daniel Cedre · Answer

1. It will need some future work to the land itself because the road is gravel and truly needs to be resurfaced, I received a quote for 1,200 to resurface with new gravel. As far as the units, two of them have been updated to granite surfaces,new windows, updated baths etc... the other two as straight out the 80s but well kept and functional.

2. I have been approved for 80/20 for 10 or 15 years(my choice on which one).

3. They all have 6 months or less left on their leases and all the units are leased.

4. They have income statements, for the past year that they have provided and from what im seeing they have not had any vacancies for the past two years( I wouldnt want to move either if i was paying 300 a month).

Paul Bowers · Answer

Keep in mind, every current owner and their agent tells the prospective buyer that the rents are too low.  Have you done the market research and confirmed that?

Paul Bowers · Answer

Does the property need any work currently or in the near future?  What kind of financing terms do you have lined up?  How long is left on the current leases?  Have you seen the actual proof of the numbers stated for rent and have the tenants actually been paying on time?