Should I Make It A Deal?

Question

Hi All : )Haven't posted something for a long timeBack then I was a guy wanted to invest outside of his country, but a lot of things changed and I'm living in the states now : ) San Diego, CA (unfortunately LOL), so now it is investing out of my stateI have tons of questions and I would like to have your guidance!So I read somewhere here that Phoenix AZ might be a nice place to start investing and I'm using realtor.com to look around since I know nothing on any area here in the US..too big for me (Israel..you can understand why :) )I found the following duplex:https://www.realtor.com/realestateandhomes-detail/...According to some basic analysis I've done, hopefully I did it right, I don't think it is a good dealThe data I pulled off this listing:Price - $175K$750 * 2 rent$1028 tax (I think this is too much according to https://mcassessor.maricopa.gov/mcs.php?q=30076006... - Assessed LPV is $5,782)$1200 trash, $500 water/sewer, $800 insurance - I assume all are annually, but I should askThe owner should take care of landscaping - currently no idea how much should it costNo gas info, no pics of the 2 units and it is written that tenants should not be disturbed since they are not aware of the sale - So for me, it is like I can't really send an inspector5% vacancyMy questions:Do you have any recommendations on how can I tell the trend of the area? So according to the official county records, they estimate the FCV to be lower next year. Looking for some guidance on how can I tell if the rent will go down and stuff like thatWhat about situations where there are not a lot of "for rent" listing on an area..What is the best way to estimate the rent?When should I ask myself "Should I make it a deal?" - So I think this is not a deal, but when should I put efforts and change the numbers so it will be a deal and when should I say "it doesn't worth my time"? For example what if this duplex has no mortgage and I can have seller financing with 0 down payment? That might make it a deal..but should I even try run these numbers?I didn't understand online mortgage calculators - they all include property tax + homeowner insurance and I thought they are separate bills (like you see in this property's details) - How should I estimate my mortgage payment?I read that property taxes are constantly increasing, I guess it is because most of the time the property's value is increasing - How do you guys handle this situation when it comes to cash flow?Current listing has also something called "commercial info" containing "Net Operating Income" & "Operating Expenses" - What are these?I think that's it LOLThanks! : )

Tim Herman · Answer

@Oron Subayi real estate is a numbers game. Back of scrap paper analysis 1% rule. Monthly rents divided by 1% = max purchase price. $1500 monthly/.01=$150000 max purchase price. The other scrap paper analysis is the 50% rule. Half the rental income goes to expenses other than mortgage and profit. $750 minus $644 PI= $106 profit. PP $150000 and 20% down @5% interest. BP has a calculator for rental properties that you can use up to 5 times under the tools section. Upgrade to pro and use it as much as you want. Also in the tools section there are spreadsheets that can be used to run the numbers. Go to the app store and download a mortgage calculator. Operating expenses should be all expenses except mortgage for the property. Net operating income is Total income minus operating expenses. A lot of times they don't include all expenses just like lawn care, that is when your due diligence starts.

Oron Subayi · Answer

Very informative @Wes Blackwell..Thanks!I'm not going to buy it..I asked as part of my learning process, so i'll know on what I'm looking at : )

Wes Blackwell · Answer

@Oron SubayiSo, here's probably what's happening. Sometimes instead of all of the units being attached to each other, you might find three duplexes all on the same lot and being sold together, essentially making it a 6-unit property. Or, each duplex might be on a separate lot, but the investor owns all three and would like to sell them as a package deal.I did a transaction like this recently where there were two triplexes on two adjacent lots, but they shared a common driveway and by all means designed to operate as a 6-unit property. But because they were on two separate lots, there were two separate listings and the buyer got two separate loans to purchase them. So that's the real question when it comes to your financing... how many units are on the individual parcel? 4 or less = residential. 5 or more = commercial. If it's a package deal of two fourplexes each on a separate parcel then you would get two residential loans. Four duplexes on four parcels? Four residential loans. Granted, you may be able to find a portfolio lender willing to do something a little more creative, but generally this is what you're looking at. Sometimes you'll see package deals of 16 single family homes, and finding a lender to give you 16 individual residential loans would be a nightmare, so a portfolio lender or creative financing would be a better approach.Income and expenses mentioned in the listing are a good starting point, but the information will need to be verified. Especially if it is less than 5 units. Those more often tend to be mom and pop investors who may not always track those sorts of things. 5+ units you're more likely to find experienced investors and professionally managed properties. For example, it may say it generates $4,000/month in income, but that might only be a pro-forma guess by the listing agent, or maybe that's with the vacant unit generating more income than the others because everyone else is renting at undermarket rates. Or, maybe it would generate $4,000/mo in income, but one of the tenants is a month behind and has been late several times in the past year. You'd want to know that going in. Rent rolls, proof of deposit, or bank statements can verify the income.For expenses, utility bills make it real easy to determine electric, gas, water / sewer / garbage, if it's managed the property manager has their fee obviously but also probably tracks most of the other expenses. HOA dues are easy to determine. Be careful of deals made with tenants where one of them maintains the grounds or does repairs and gets some sort of deal on rent or something, because that's essentially an expense. The hardest part to determine is repairs / maintenance, because it's easy for things to slip through the cracks, paid with cash, lost receipts, fixed directly by the owner, etc.If you message me the address I can probably find out some more information for you and help you look at the numbers.

Oron Subayi · Answer

Hi @Wes BlackwellSo the main thing is that these listings I found are usually duplexes, but still have these commercial infoThis is why I don't understand why : )I mean I guess you buy something which is part of a bigger complex- For example one duplex I remember that it was part of 8 units I thinkBut the guy advertised only separate duplexes - Should this affect my financing?And what about these income\expenses mentioned in the listing? Are they even relevant?Thanks! : )

Wes Blackwell · Answer

A commercial multifamily property is any property that has 5 or more units. That's what classifies it as commercial. Any property with four units or less (fourplex, duplex, three homes on one lot, etc.) is considered residential.The main way this will affect you as an investor is the financing. Two completely different animals. If you are a newer investor, I would recommend starting with residential multifamily properties until you get some more experience. Once your properties appreciate and you pay down the mortgages a bit, you can do a 1031 exchange into a larger multifamily property if that's what suits you.Any other questions feel free to ask. Here to help :-)

Oron Subayi · Answer

Thanks a lot @Wes Blackwell!It was helpful..just 2 things to say here1. Regarding the property tax going up, i just see it in the county website\zillow..it always increases LOL and I thought that when people say "tax" they mean property tax2. Mortgage - I use online calculators, but I remove the home insurance & property tax from the calculation since I verify it separately - I just need to know how much the mortgage alone will cost me each month, so I think numbers are OK there3. Commercial Info - I still didn't understand what it means and how it affects me. For example the apartment here is just a duplex, I didn't know it is a commercial property..I actually don't think it is a commercial propertyI just wonder what do I do when I see this commercial info area in realtor.com. How does it affect me as an investor?Thanks! : )

Wes Blackwell · Answer

@Oron SubayiInvestor agent here in Phoenix. Let me see if I can help you get your questions answered:1. Most important thing to consider about rent trends is population growth and jobs, which go hand in hand. AZ has all kinds of people moving here from California and is the #2 retirement destination in the US for Baby Boomers. #4 in both population growth and job creation. You're solid.2. Best way to estimate the rent for a given area is have a local agent do a search for completed leases nearby in the past 6-12 months for comparable properties. There's another trick to get an even more accurate value for rent estimation, but won't share it publicly. Message for more info.3. Totally depends on your investing experience and goals. You should pull the trigger when a deal meets your criteria for a rental property and is better than most of the other deals you're likely to come across if you were to continue searching. 4. If you have a hard time running the numbers, work with an experienced agent, investor or lender who can help you. DO NOT MESS THIS UP!5. Where did you read this? Totally going to depend from state to state, county to county, municipality to municipality. Not like it's going to go up overnight and kill the deal or make the property no longer cashflow. Wouldn't worry about that as much as the PITI, maintenance, HOA, etc.6. Below are screenshots of the information you requested -- this is why you work with an agent :-) We're here to help and can get WAY more information than you can off Realtor.com to help you make a more informed investment decision.Hope this information helps. Property is still available if you'd like me to get more information for you :-)

Tim Herman · Answer

@Oron Subayi All properties can be made a deal. reverse engineer it. you want $200 per door or $400. using the 50% rule $750-$400= $350 for PI. So you can offer the seller $65000 for his duplex. Not likely he will discount it that much. For me if it isn't close to the 1% rule I move on.

Oron Subayi · Answer

Thanks @Tim HermanBut as I said..I did the math and it doesn't seem to be a good deal, so my main question is when would you guys say like "ok..maybe if I change this and that, it can be a good deal" and when do you say "it doesn't worth it"?And bunch of other questions LOLP.S.I don't think having a PRO worth it..it took me 1h to make an excel with the basic stuff and I'll probably extend it as I understand moreThanks! : )