What am I missing here guys?

Question

Hey guys, my name is Jessyka Bailey and I'm new to BP. To be honest, I'm new to the idea of ever thinking that I could own a property in my life but after attending DJ Envy's seminar in December I know that I can do it. Probably a little different but other than skateboarding (yes, I do tricks) I have worked in sales my entire life. I take a lot of pride in being able to talk and communicate with people. Right now I'm living in Brooklyn and working as a server in the West Village and I've already told myself that after this serving job I'll never do it again. Honestly, the quick money is quite addicting and I don't want to end up doing it for the rest of my life. Not sure how detailed people get on these but I am lucky to have been able to positioned myself to have a lot of free time during the week to pursue skateboarding and continue to progress. So yeah, I work like 20 hours a week and do gigs modeling when they come along.

Anyways, I am trying to understand on how to see if a deal is good. I'm attending the Webinar on Wednesday but wanted to get a head start because I'm going to an open house tomorrow for fun. I just read this blog How Do I Know If a Property Is a Good Investment and I think I did the same math But something is off. I just wanted to get some insight into if I totally botched the math or what I'm missing or over compensating for.

So here it is.

Property

Buy $598,000 5 Beds 3 Baths 2,200 Sq. Ft.$272 / Sq. Ft.

Estimated ARV- $749,174 (This is estimated by finding the average between the neighboring houses)

Cost to repair-$100,000 (take a look at the property, I'm not sure something like this would cost)

Now hypothetically, I would like to us an FHA loan @ 3.5% to get this done.

$598,000 - 3.5% down = $20,930 + Closing Costs = $31,000 (out of pocket)

Would my next step be to take out a hard money loan for the $100,000 ? Fix it, Refinance or do I go to another bank for the $100,000.

Mortgage- $3514/monthRent- First Floor 2BR $2000 Second Floor 3BR $2500 TOTAL- $4,500

Side Note: On the post the basement is called "rooms" so I'm assuming they don't follow the building permits to call them rooms. If possible I would like to make it into a 2BR but for the sake of this post and me having to go to work lets stick with this.

Insurance= $361/monthProperty Taxes= $160/monthPM= $450/month (10%)Repair Costs= $450/month (10%)Cap Ex= $450/month (10%)Vacancy= $225/month (5%)Total= $2090 - Rent = Cashflow $2410Monthly Cash Flow = $2410Annual Cash Flow= $28,920Cash on Cash Return = $28,920 / $131,000 = 00.22 or 22%

Is this right. Where did I go wrong. Send help, and please go easy on me. Thank you for your time,

-JB

Erik W. · Answer

Account Closed

You calculated Net Operating Income (NOI) properly (income - operating expenses and vacancy).  Cash flow is $2,410.

But you still have to pay your mortgage of $3,514 / month out of that NOI.

This building is going to cost you approximately $1,100 / month out of your own pocket just to break even.

The way you can do a "spit wad" estimate of whether or not a deal will work is the "1% Rule". The monthly rent must be at least 1% of the total "all in" costs (purchase + closing costs + rehab + holding). You estimated your total "all in" costs at almost $700,000, so if we divided your monthly rent of $4,500 / $700,000 we get 0.006 or 0.6%, which is way below the target 1%. I'm not saying every property has to fit the 1% rule to be a good deal, but anything below that and you'll probably be cash flowing negative, as in this case, after expenses and debt service.

The other thing is no hard money lender will lend you repair money unless you have an excellent equity position in the property, such as 60 or maybe as high as 70 Loan to Value (LTV). Right now, you're buying it at almost 93% LTV since the purchase cost is almost $600,000 and you estimate it will take another $100,000 to fix it, and the ARV is $750,000. LTV = $700,000 / $750,000 = 93%. No hard money lender will touch that.

My vote is keep looking for a better deal.

Ronan Donnelly · Answer

@Peter Nikic - this is pretty wild, I am currently posting from the bar at Alta. Go West Village BP crew :)

Account Closed - I am thinking we need a west village meetup for BP members / real estate investors

Account Closed · Answer

I’m so sad that I’m just now seeing this. I’m on my way home now but Thank you guys for the advise. Maybe we should do a West Village meetup?

Account Closed · Answer

@Erik Whiting wow thank you! This was so helpful. I’m going to look more into the 1% rule Erik. I appreciate you reading this

Peter Nikic · Answer

Hi Jessyka,

I think you're on the right track. It's hard to be so specific with such a small property. I remember Brownsville when I dared not step foot anywhere near it, but I hear it's changed drastically.

Your plan is good, I'm having dinner at Alta in west village tonight, if you happen to be working there, we could talk for a few minutes.

It looks like a good solid bldg. 2 family is good. The basement can also be rented, probably not legal now, but they're starting to legalize all basements. They're starting in Brooklyn first, so this could yield you a 3rd apartment.

Your insurance seems a little too high, you can manage it yourself, you don't need to borrow money for renovations. If the units are rented, there is no need to do any work. The reason you'd want to do work, is if there is a vacant unit and you want to renovate it in order to get a higher rent. Otherwise don't plan on any apartment work before you have a vacancy.

This could be a good investment if everything falls in place. It can be tricky at times, so you have to have patience and extra cushion ($$) just in case.

Unfortunately I can't be at the open house tomorrow, going upstate, but I'd be happy to speak with ypu in more detail and help you answer any other questions you might have.

Don't hesitate to message me.

BTW I can connect you with a great buyers agent if you don't already have one. A good buyers agent will be very helpful thru the entire process and the best part is that it doesn't cost you anything.

Bill O'Donnell · Answer

@Jessyka Bailey

Good luck in your hunt. I won't say that you won't find what you are looking for in Brooklyn, but it will be very difficult.

If you have trouble don't give up. There are easier areas that are commutable to the city. Look toward  NJ., the Bronx, and further north of the city up as far as poughkeepsie. Or consider Connecticut along the i95 corridor.

Opportunities are out there, but lower cost areas tend to cash flow better. However, if you find a deal in Brooklyn, or close to The city,  you'll likely get appreciation. Coupled with tenants paying all or most of your mortgage, you'll end up in a great position if you can make it work.

Peter Nikic · Answer

Well that's funny! great place, my first time there. We sat all the way in the back near the fireplace.

What am I missing here guys?

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