Deal Analysis Thoughts - What Could Have Been

[Ryan Jones]

Hello,

I'm based in Bakersfield, CA and recently put an offer in on a condo. Unfortunately I was beat out by an all-cash offer but this one was the first "deal" I saw that actually had respectable forecasted returns. I'd like to hear your thoughts on my analysis, specifically if you view this as a good deal (as I thought it was) or not and your thoughts on my assumptions - too conservative on vacancy impact?

• Offer price: $170,000
• 20% conventional, 30 years, assume 4.5% interest for rental property
• Assume down payment, closing, minor fixes = $40,000 cash
• Mortgage & Interest: $689
• Property Tax: $218
• HOA: $241
• Insurance: $60
• Property Management: $100
• Maintenance: $50 <-- efficient ~1,000 sqft condo, HOA covers all exterior (also water and basic cable)
• Vacancy: 8.33% ($131)

Total average monthly cost: $1,358

Total average monthly cost w/ vacancy factor: $1,489

Expected rent: $1,575

Averaged expected cash flow: $86 w/ vacancy impact; $217 w/o vacancy impact

Cash on Cash: 2.58% w/vacancy; 6.50% w/o vacancy <-- how does that "feel" for California? This is best I've seen from my analysis of local deals and is hard to understand how others seek 15-20% deals.

Return on Investment - Year 1

• Cash on Cash: $1,032 (2.58%) w/vacancy impact; $2,601 (6.5%) w/o vacancy
• Principal Paydown: $2,149 (5.4%)
• Appreciation: $1,700 (4.3%) <-- assume 1% appreciation after last year's market & that it's a condo
• Total ROI for year one: $4,876 - $6,450 --> 12.2 - 16.1% w/ and w/o vacancy impact

Thank you!

[Joe Villeneuve]

This falls under the category of "sometimes the best deals you make, are the ones you don't".

You're getting lost in the percentages...which are leading you to rationalize that this might somehow be a good deal.  Look at the results in dollar$....NOT percentages.

Also, don't ever buy properties just because they are the best you can find. That's a terrible way to make money...and that is why you go into REI, right?

Here are the number$ you need to look at.  Then you tell me if you barely escaped, or missed out.

Recovery of Cost (Cash in) and start of Profit:
A - Cash in = $40k
B - Cash Flow/year (recovery):  $1,032/yr
C - # of years until you recover Cash/Cost =  31 years (30 years of mortgage + 1 year without mortgage)

It doesn't matter what the property value is, or where it goes up to, unless you plan on selling the property to get access to it.  You won't be able to refi since any equity you'd want to convert to cash, would only increase your monthly payment, and turn you measly positive (actual negative waiting to happen) cash flow into always negative cash flow.