What if I don't "buy it right"?

[Altwon Simmons]

Hello brothers and sisters of BiggerPockets👋🏾. I have a situation I'd like some help with. I sent my very 1st letters out and my mothers neighbor (a duplex owner) is welling to sell. The problem is that his asking price is market value😔. I ran all the numbers with the BiggerPockets calculator and it still cash flow a few hundred dollars a month and it makes me feel like it's a great deal but if I'm not "buying it right" I'm I setting myself up for a terrible situation?? Here some information on the deal. Grade of the area.... C- Asking price... 75k Square feet....2000 (each unit is 2bed 1bath) City..... Buffalo NY Rent-o-meter........ $1500 ($750 per unit) Home condition.... C (will need a roof within 5-7 yrs) Does these numbers say RUN or should I be trying to close this deal asap? HELP ME BP FAMILY!🙏🏾

[Account Closed]

@Altwon Simmons

First of all, you don't need to hurry. You need to calculate and then make a decision to pull the trigger or not. Put aside the automated deal calculator and let's do this the old-fashioned way. You've got to walk before you can run.

1. It's a rental property. Figure a value through the capitalization rate. Let's begin with assuming that a 12.5% cap rate will work for you in a Class C- neighborhood. It does for most folks.

2. A Class C property always has a number of deferred maintenance issues (like that roof) waiting for you. So we're not going to worry about that in our initial calculation.

3. Figure out the Gross Operating Income per year. In this case, it's $18000 a year.

4. Now you need to subtract some numbers from that $18000. The main ones are property taxes. What is the property assessed at by Erie County? I did a bit of looking and this is the millage for the rest of your taxes: Non-Homestead property + school district taxes, 27.009026 mili rate. Sewer rent millage: 1.6535119. Erie county millage: 6.456522. Using the given county valuation for the duplex, figure the tax rate and subtract the taxes.

5. Are you going to have this property managed by a third party? Subtract $1800, 10% of gross rental returns.

6. How much in yearly maintenance are you going to need here? Replacing that roof on a structure that size is going to cost you $12,000 if you get a nice quote on it in Buffalo. I would subtract at least $2500 per year. Be on the safe side and subtract another $1500 for other maintenance issues. So $4000 per year.

7. Both tenants have been there for over 3 years. Subtract $1500 for vacancy, 2 months per year, which is optimistic but not particularly unrealistic in this case, I think. Worry about how you're going to upgrade it and put in college students and deal with their problems later.

8.  How are you getting the money? Cash? Loan? What is the financing cost per year? Subtract that value.

9. Now you are at your net operating income (NOI). The asking price is 75,000. 12.5 cap rate is your target. So divide $75,000 by 8. $9375 is 12.5% of $75,000.

10. Is your NOI equal to or greater than $9375? If yes, buy. If no, do not buy.

It's a rental property. It generates income. You are buying an asset that generates income. It could be compared to any other asset: shares in a company, a hotel, a dog-walking business. Would you be happy buying stock that generated a 12.5% return on your investment every year? Would you be happy buying a dog-walking business and having the dog walker give you 12.5% of the money you sank into the business back every year? Probably. That's why you calculate the cap rate like this.

Is the property going to go up in value? Is it going to go down in value? That does not directly depend on the neighborhood and what single-family homes in the neighborhood are doing. It only directly depends on how much rent you can get from tenants living in those two apartments.

Hope I've helped.