Thoughts on this deal?

Question

So this year I would like to purchase my first investment property.  I have been looking in Pottstown, PA and Norristown, PA mostly.  I found a deal that seems to be a good one.  Here is the info on the property.

** Unit Information **Total Units: 3Total Square Footage: 03 Units: 2/1 (0 sq.ft., $850 Rent Per Month)** Purchase & Rehab **Purchase Price: $162,500 ($0/sq.ft., $54,167/unit)After Repair Value: $162,500Purchase Costs: $4,875Rehab Costs: $5,500Down Payment: $40,625Total Cash Needed: $51,000** Financing (Purchase) **Loan Type: AmortizingLoan Amount: $121,875Loan to Cost (LTC): 75%Loan to Value (LTV): 75%Loan Term: 30 YearsInterest Rate: 3.8%Monthly Payment: $568** Cash Flow (Monthly) **Rent: $2,550Vacancy: -$255 (10%)Expenses: -$1,157 (50.4%)NOI: $1,138 ($379/unit)Loan Payments: -$568Cash Flow: $570 ($190/unit)** Returns & Ratios (Year 1) **Cap Rate (Purchase Price): 8.4%Cap Rate (Market Value): 8.4%Cash on Cash Return: 13.4%Return on Equity: 14.3%Return on Investment: -12.7%Internal Rate of Return: -12.7%Rent to Value: 1.6%Gross Rent Multiplier: 5.31Equity Multiple: 0.87Break Even Ratio: 67.6%Debt Coverage Ratio: 2Debt Yield: 11.2%The only thing that worries me is that its an old and dated place.  I'm a handyman and my mind wants to fix a lot of things, but 2 units are currently rented and the 3rd has had many applicants according to the property manager.  So to get them rented wouldn't require much work at all.  Also some big ticket items have been done; the roof was done about 5 years ago and it's all new wiring throughout the building.  I believe with some modern upgrades each unit could rent for around $1000 as well.  Let me know what your thoughts are on this!  Should I take the leap??

Josh Norell · Answer

You don't break out your expenses, but I would be conservative here on an older property. The new roof and electrical is good, but I'd estimate 10-15% in maintenance and capex on an older property of this price point. Though if you're doing your own work, that would help keep that down.

Where do you get 3.8% for  interest rate? I'd be quite surprised if you are able to get that rate with no points on an investment property.

Keith W. · Answer

Jeff- First let me congratulate you on getting this close on your first property.  You are asking some great questions and getting some good feedback here.  I'll add my two sense as an investor in Norristown (not sure if you are investing in Norristown or Pottstown).   It looks like your financials are based on the current rent of $850/unit.  You mention that with minor improvements (within your $5500 rehab costs??) the rent could be $1000.  Do a proforma operating statement based on the improved rent.  Use a CAP rate appropriate for the area and re-value your property based on the improved NOI.  That will give you and idea of the value creation opportunity.  As a new investor I would caution you to be conservative with your occupancy rate or maybe more accurately- your rent collection rate.  For a new investor, these can be challenging markets.  Sometimes when a tenant does not pay you can get mad, take them to court, win, file judgements, etc, etc.  But if they own nothing and have no money and transient work you will not collect.  Tenant selection is important.  But this can be managed.  Also don't underestimate the cost of doing business in Norristown.  (not experienced in Pottstown).  Licence fees just went up (you will need 3 rental licences) and they have increased inspection on rental properties to 2-3 per year.  These take time and money to deal with.  For our business, I look for what may be more value add opportunities.  Buy a little lower, rehab a little more and refinance to reduce the equity trapped in the property.  Also seems like your financing terms are quite liberal....  Good luck!!

CJ M. · Answer

@Jeff Dimmler

The numbers look ok to me from quick glance...nothing exciting though as you're going to tie up a lot of capital in the downpayment and only for a 13% return (you're in the midwest and should be able to do better imo). Because of that, I would pay close attention to what your overall REI goals and plan are, and make sure you can still accomplish everything with that much $ tied up.

A couple of questions/thoughts, you have the purchase price and the ARV as the same number ($162,500), and then you have rehab at $5,500. Does this mean you're purchasing the property $162,500 and then have to put $5,500 more into it? (i.e. you'll have $5,500 more into it than what it's worth?).

You can also check the auditor site and get an exact figure for property taxes. Call your insurance agent for a quote as well.

Re: the building being old and such, you're paying what it's worth (if I read your post correctly) so that scare me a bit.

CJ M. · Answer

@Jeff Dimmler

No problem at all. I'll quickly add one more question for consideration...do you really want to spend $162K when you just used the following phrases?

"I think"

"It seems"

"I'm not really sure"

My point being. For that type of an investment I would be way more confident in my numbers and plan before shelling out that type of money. Try talking to some realtors and see what they estimate the ARV to be. If this is your first deal, you may even want to consider a lower cost SFR to get your feet wet.

Jeff Dimmler · Answer

Thanks all for the responses.  I have since decided to pass on this property.  It looks like a good investment, however, it will prevent me from further investments in the future since so much money will be tied up.  I think going with a cheaper SFR is a more comfortable and safer way to start.  I really appreciate the advice from everyone!  The search continues!

Jeff Dimmler · Answer

@CJ M.

Having that much tied up into one property is a concern as well.  Ideally we would find a place to BRRRR, but it seems really difficult to find because everyone is looking for SFH and MFH to BRRRR.  The plan for this property would actually be to have a private investor pay a good portion of the down payment (someone we know is interested) and I would do all the work on it so we would be partners.

As for the ARV, I'm not really sure what it would be.  There aren't many triplex's in the area and I'm not sure how I would find out what it could be worth with more modern upgrades.  I tried to be conservative with my numbers so that's why I kept it like that.  The $162,500 is also a few thousand over asking, again to be conservative with my numbers.  It seems like the bones are good and some big ticket items are done such as the roof (5 years old) and updated wiring throughout.  If I wanted to keep rents the same, I wouldn't have to do much in the units (painting and spackling which I would do).  If I modernized the place a bit I think rents could increase to around $1,000 per unit and would be around $5,000-$10,000 per unit.

I feel like the investment would be a good one, but having money tied up and it being an older property has me worried.  This also all happened so fast and I'm not sure I feel confident that I have everything together enough to be ready.  I'm not sure if that is because I'm not quite ready yet or if it's more of me being scared about doing my first deal.

Anyways, I appreciate your response.  You brought up some good points!

Thoughts on this deal?

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