Newbies nervous about rental prospects

[David S.]

Hey all,

I'm looking at a HUD deal right now and my bidding deadline is for tonight. It's a triplex listed at 132k (my bid would not go above 105K, which probably would not be accepted but we will see). It probably needs between 35-45k rehab. Waiting for comps to be pulled but based on what I've seen I'm comfortable putting it at 200k. Total monthly gross projected to be between 2,600-3,000. I am not super familiar with this area but I am comfortable with it. It's near a rough area but this is definitely a better part as it is a couple minutes from public transportation train (Greenville part of Jersey City for those who are familiar). However, in my research I came across a couple of issues that is holding me up mentally. I spoke to a couple of brokers and one broker said that there is a large supply of apartments on the market and combined with a large supply of short sales in the area, it seems that is hurting the rental market further because prospective tenants, with relative ease, could get into a house through various programs for financing.

I would like to hear your thoughts on the above. The deal is certainly not exceptional. The taxes for this 3 family is about $6,600 I think (Jersey.....). Is this something you would stay away from except if it exceptional?

Looking forward to the BP input.
Thanks,
DS

[Jon Holdman]

Simple analysis:

Price plus rehab: $150K ($105 price plus $45K rehab)
Payment: $899 (100% financing, 6%, 30 years)
Rent: $2600
Expenses: $1300 (see 50% rule discussion in rental property forum.)
NOI: $1300
Payment $899
Cash flow: $401
Cash flow per unit: $134

Looks good on that basis.

You need to be sure about your value. Being at 75% is OK, but not great.

You need to be sure about the demand. Your concerns are very valid. If there is limited demand, you'll have trouble filling the vacancies. That either means long vacancies, reduced rents or both.

Given your deadlines and uncertainty about demand, I'm not sure this is something you want to jump on.

Just for completeness, the last piece of the analysis. I assume you'll actually put 25% down on the property and pay for the repairs out of pocket. So...

Price: $105K
Loan: $78,750
Down: $25,250
Payment: $630
Rehab: $45,000
Cash invested: $70,250
Cash flow: $670/month, $8047/year
Cash on cash return: 11%

If you have some way to avoid having that much money into the deal this would be more attractive.