First Potential Investment Property!

[William Donaldson]

I currently live in a college town that was hit pretty hard by speculation and foreclosures. The property I am looking at sold for $125-140k back in '07. The complex is around six years old and in good condition. The apartment units are 4br/ba and the townhouses are 4/br/4.5ba with a good bit more square footage and a small "porch" (concrete slab). Most of the tenants are college kids with one-year leases. Tenants pay electric. Based on comps and research, I'll include the figures I've come across for this particular apartment.

Purchase price: $75,000

Gross Rent: $400 per person x 4 people = $1,600
PI = ($450)
Vacancy: Low in this area but let's say 10% = ($160)
Condo fees (includes insurance) = ($200)
Taxes = ($100)
Expenses & Water bill = ($250)

Cash flow = $440

Vacancy was reported to me at 97% by a property management company. I live right by this complex and find this number believable. The unit I'm looking at is a flat, not a townhouse, so the purchase price will be around $62,500-$65,000 but the rent will be more like $355-375 per person. FNMA has several foreclosures and with their Homepath financing, I can get 3% down and low interest through an approved lender since I will be living at the property for at least a year.

I would love for a more experienced investor to check my calculations. Also, I know I will need a cosigner because my credit history and income history is minimal, though I did make a pretty good amount of money this past year with my property preservation business. Would a bank loan the amount to me, without a cosigner, based on the merits of the property as a commercial loan? I have no debt and about $20,000 in cash and a short-term note for $7,500 with more income possibilities over the next year with my business.

[James H.]

Using the 50% rule, you have 50 percent of gross rents to pay for expenses. The remaining 50 percent will pay for the debt service. In this case, I would also add the condo fee and the utilities to the debt service. so that would leave you with 800-450-250-100. The 250 is the utilities and the 100 is the proportion of the condo fees I assume does NOT go toward insurance (which is covered by the other 50 percent).

So that leaves you with a break even property. Since you are quoting rent for all for rooms, I assume you will not live there. In any case, you will not live there forever, so this is a good way to analyze the deal.

What kills this deal for me is the utilities and the condo fees. MAYBE there could be some upside to offset those fees as I believe the 50 percent rule can be a bit conservative for small operators. The upsides would likely include lower exterior maintenance expenses (since you are paying for them with a monthly condo fee) but dealing with 4 seperate tenants erases any upside from that because it will be more management intensive and more interior maintenance expenses. Just my opinion.

I would not buy it.