Looking at my first investment

[Troy B.]

I have been looking and studying up on buying investment rentals for a few years but have yet to get the nerve to jump in. I looked at a property the other day and I think it could make a decent investment.

It is a brick flat roof duplex and a single family home both on one lot. Both are in good shape and appears to need very little immediate work. All units are now rented and renters pay all utilities. The property is five blocks from my house so I would self manage the property. Here are the details in case anyone can give me their opinions on this deal.

Price: 98,500 (would offer 95,000)
Taxes: $2200
Monthly rent totals: $1260 month

I contacted my bank for a commercial loan and they gave me a rate of 4.7 on a 15yr. loan, fixed for 5yrs and adjusts at current rate. With 20% down.

Under my current calculations with loan, taxes, insurance and around $2000 in yearly expenses it should leave me with around $900 cash flow and 8.33% cash on cash. If I went with 20yr these figures would be much better but at 38 yrs old and wanting to have it as a retirement I'm not sure I should go above a 15 yr loan. Any thoughts on this deal would be greatly appreciated.

[Uwe S.]

Troy, welcome to BP and I must say this is not a good deal.

Why?

Okay, first you have $1,260 income monthly and must pay $2,200 in taxes for this propertie so this is 1.75 month of your income to pay your taxes. A ratio of 1.5 should be the highest.

Second, you will offer $95,000 with 20% down ($19,000), this is a financing of $76,000 for 15 years at $590 a month.
Dont know if you read some of the 50% rule ghere on BP, but if not 50% of your monthly income you should be calculated for expenses. So here my calculation:

$1,260/month = $15,120 yearly - 50% expenses = $7,560 NOI or $630 per month minus your payment for financing of $590 remains $40 in your pocket monthly or $480 yearly = far too little.

You need about $80 NOi per month per unit!!! better is $100 for a good investment, so you need a cash flow of $2,880 per year.
In this case the price of this propertie schould not be more than $62,000 minus your 20% downpayment, so you save $200 for debt each month.
This is an deal for you then.

-Uwe