Going to look at first potential buy and hold deal. Do my numbers validate digging deeper?

Question

Came across a foreclosed SFH that has been converted into a 3 unit  building. Two 2br/1ba apartments and a 1br/1ba apartment. The list price  is ~$350k, estimating $60k in rehab costs. I'm estimating ARV to be  ~$450k. An identical, moderately renovated property nearby is renting at  $1550 for 2br and $1150 for 1br. I would be looking to buy at as close  to $315k as possible, but I calculated using a purchase price of $330k.  I'll be going to visit the property with my agent and a contractor this  weekend to get more accurate numbers. So here's what I have so far from the BP calculator:

Vacancy (10%): $316

CapEx (5%): $198

Management (5%): 198

Taxes: $375

Maintenance (5%): 198

Insurance: $100

PITI: $1,567

Sewer and Water: Tenants pay

Trash: Tenants pay

Heat/Utilities: Tenants pay

HOA: N/A

Monthly Income: $3,950

Monthly Expenses:

$2,952

Monthly Cashflow: $999.92

Total Monthly Cashflow using 50% Rule:

$408.42

Cash on Cash ROI: 15.35%

Any tips for the first showing?

Nathan Brooks · Answer

I agree with Account Closed ... for me it would definitely be a pass.  Here is the other thing to think about, if the building was converted, was it done so correctly? Sounds like with a $60k rehab you would have to be pulling permits, which means if that wasn't permitted that way, you just may run into some issues.

There was a killer deal I had to pass on because the city would not allow the use of the property as a muitl-unit, but instead had to be back as a SFH.

Account Closed · Answer

That 5% for management seems pretty low. I usually pay 8% for single family and 10% for multi-family.

Also, are you going to be putting 20% down AND paying the rehab out of pocket? That would be what, about $126,000? That is a lot of cash to buy $400 per month cash flow. If the $999 cash flow is accurate, the numbers look better, but not a home run deal.

Bob E. · Answer

@Joseph S. If you are using a Mac for the @ thing type the @ and ? mark to get the  current list of names on the thread or, type the  @ and space and start typing a name  and a directory will come up.

Joseph S. · Answer

Thanks everyone for the feedback. Pardon, as I continue to learn the ropes. On a side note, the @ function doesn't seem to be supported by my browser.

Austin – My intention would be to manage myself. I cut the standard 10% that I’ve observed on BP in half due to that fact. I would be aiming for an FHA loan, possibly a 203k, so I calculated at 3.5% down. My numbers included 2% closing for a total of $18,150 to get in the door. On the other hand, I also calculated $100 less in rent per unit than the other building is getting. I tried to flub conservatively in a couple of different directions so that if I were wrong on one, it had the potential to be offset by another.

Andy – The $60k rehab would likely be a private loan with terms that I could manipulate. It’s very possible that I’m wrong for thinking this way, but I excluded those costs as I wouldn’t have to pay them back until I was ready to do so. I did not calculate holding costs at all, so thank you for pointing that out! Either way it goes, I’m happy to be learning.

Nathan – Thank you for that thought! I hadn’t even considered it. I’ll definitely look into this. Would you be able to point me in the right direction as to the best approach to finding out if the building was converted properly?

Aaron – Your numbers look better than mine and I’m trying to figure out how that happened. Did you use $312 purchase + $60k renovations – 25% down?

Aaron Montague · Answer

@Joseph S.

Most likely you are going to have to put 25% down.  It looks like a good deal at $312k if you can roll your 60k in renovations into the loan.

Here is how I see your numbers after the renovation.  I added 10k in holding costs into my closing costs to account for 3+ months of lost revenue during renovations.

Mortgage Rate 5.00%

Length of Mortgage in years 30

Monthly Mortgage payment $1,497.73

Taxes $375.00

Sewer and Water $-

Trash $-

Heat/Utilities $-

HOA $-

Cap Ex and Ops $156.00

Insurance $100.00

Mgmt Fee $425.00

Vacancy $340.00

Total Expenses $2,893.73

Unit 1 $1,550.00

Unit 2 $1,550.00

Unit 3 $1,150.00

Total Revenue $4,250.00

Cashflow/month $1,356.27

Cashflow/year $16,275.21

Cash on Cash Return 15.00%

Paul S. · Answer

I agree with @austin Lee the management fee does seem a bit low. Also, I think @Nathan Brooks brings up a great point about the permits. Have you included the cost of those in your rehab estimate? Also your hold time could be increased if you end up having to wait for a permit to be issued.

Nilesh Makhija · Answer

@Joseph S. - I would that's a lot of cash to start with. Also the risk is higher if the permits needs to sorted out. We do few deals in the area where you are with less cash. But again as we know every situation is different

Andy Collins · Answer

I can't figure out how you got to the 15.35% cash on cash number, but when I run these numbers in my head it isn't even close to that.

Are you putting 20% down ($66k) plus $60k rehab?  with $126k in the property that cash on cash doesn't work, and are you including your holding cost during rehab as part of the rehab?