What do you think of this deal?

Question

So, my husband and I are looking to purchase a Multifamily investment.  We live in Northern NJ where prices and taxes are high but so are rents.

Here is a property that I am considering in a very desirable town, with many good transportation options to NYC.  What do you think of this deal?

2 family home.
Target price of $285,000
Taxes: $8,400
Rents: $2,900 total per month ($1,200 and $1,700)

Property is in good shape.  If I put $75K down and take out a 30 year loan at 4% rate, my P&I is $1,002 and taxes are $700 a month.

I'm new to this and so overwhelmed by all the various calculations so am interested in receiving some expert advice!

Maggie Dolan · Answer

thanks again, Joel!

I am not too concerned about the water costs.  The duplex has new plumbing.  There is no ability to wash cars as there is no hose near the driveway.  Also, the washer and dryers are coin operated so I don't think tenants would abuse this.

I do think the rents are appropriate for the area.  One unit is a 1BR 1Ba that has been receiving $1200 in rent.  The other unit is 3 BR, 2 Ba with a backyard.  I actually think that is a below market rate.

I would prefer a marginal cash flow with potential for strong appreciation.

Joel Owens · Answer

Remember that sellers are trying to dump a problem onto you so will be nice and answer all your questions to convince you that you are making the right choice. Stick to the numbers and the economic data and location for that area and take emotion and excitement out of the equation.

If you worry about servicing the mortgage find out what the going market rent is for those units. If the seller was charging at market or above market rates that could be why the tenant left. By at a lower sales price which will allow you to rent slightly under market. This keeps you the best deal in town and makes tenants want to "pay and stay".

Joel Owens · Answer

You have to decide what is most important to you. Major cash flow in a rougher area with hardly any appreciation, decent cash flow and appreciation in a medium to good area, marginal cash flow to strong appreciation on the back end in a nicer area.

Maggie Dolan · Answer

Thanks, Joel!  I appreciate your input.  I would prefer a 3 or 4 unit but we haven't seen anything that we like.  I am concerned about occupancy but the place is in very nice condition in a great town.   
My husband calculated about a mid 8% cap on the duplex.  It seems close to impossible for finding a 10% CAP rate in the areas I am looking at.  I do see potential for appreciation on the back end.  The house sold in the 400s in the mid 2000s and I think it will get there again.  I wouldn't mind smaller cashflow and then sell when my kids hit college....  That said, I fear not generating enough to service the mortgage.  Yikes...this is stressful!!

Joel Owens · Answer

Make sure to follow the info I have posted above. Do not talk yourself into a property as it's the number one mistake by any new investor.

You put all that hard earned capital into the WRONG property and now you are stuck for years with a marginal property holding you back from making other investments.

You just said landlord pays water which is a HUGE expense. Out of all the expenses this is the one to watch the most. The tenants was cars outside, have friends do their laundry there, they do not report toilet leaks, or drippy sinks as they do not pay the bill.

Why did the existing tenant move out?? Was the rent too high that the seller  was leasing at and the market corrected down 100 or 200 a month?? You have to really research all of these things. Since you are new you really, really need a seasoned investor to bounce things off of or a real estate broker with experience that is an investor themselves.

You have 75,000 at stake plus being saddled with a few hundred k of debt service.

Maggie Dolan · Answer

I still need to get a lot of this information.  This is very preliminary.  I estimate homeowners at around $1,500.  Landscaping would be $0.  Very small property and we live close enough to do it ourselves.  No management company.  Tenants pay utilities except water (probably about $1,00/year).  The smaller unit is rented for the past 6 months.  The larger unit is not rented as the tenant just moved out and the owner is hoping to sell without having to find a tenant. It does not appear that any rehab is needed.  New furnace, new kitchens, etc.  It's a very nice area near a park, easy commute to NYC in a nice town....

Joel Owens · Answer

Hi Maggie,

If you follow this simple and simplistic approach to the numbers part you should be okay.

Multifamily data shows over time of ownership costs will average 50% of gross expected income and if the landlord pays any utilities that figure will be closer to 60% costs.

So 2,900 X 12 months = 34,800 GEI a year. 34,800 / 2 = 17,400 NOI

NOI is net operating income which is what you have left over before your debt service. A 10% CAP rate on purchase price would be 174,000. This does not include any immediate repairs needed. If for example a roof needed replacement at 8,000 your offer would be 166,000.

Now in many super nice areas especially with a small 2 unit people are buying on mainly small cash flow and appreciation on the back end. So in those cases you will see people buying for really low CAP rates such as a 6 CAP etc. On thing to think about on a 2 unit is your breakeven occupancy to service your mortgage. If one unit goes vacant you are now at 50% occupancy and usually losing money where with a 4 unit quad with one vacant you are at 75% occupancy. Having more units gives you a better breakeven point to service the mortgage.

Anthony Tarantino · Answer

Maggie:

Need a little more information on the propoerty to give an opinion.  My advice would be to list your expenses in detail.  How much does Homeowners Insurance cost?  Landscaping?  Are you using a management company?  Who pays the utilities?  What is the vacancy rate?  Is the property currently rented?  If so, for how long?  Is rehab needed?