Good investment?

Question

I thinking about diving into a multi family rental with the profit I make from my first flip. Any thoughts on this deal it just came on the market?

http://www.realtor.com/realestateandhomes-detail/3484-N-100-E_Warsaw_IN_46582_M45619-06327?row=3

Ned Carey · Answer

Casey,

Based on a crude pro-forma it appears to. However you need to do appropriate due diligence to determine the actual numbers. You can't assume the numbers they give you are accurate. Keep in mind much of the due diligence can be done after being put under contract with appropriate out clauses.

If you buy the property in your own name financing will be much easier. As soon as you choose to put the property in an LLC or other entity all the financing rules change.  Good luck - Ned

Casey Young · Answer

Wow even J. Scott chimed in! I just listened to your podcast. Thanks to everyone that's commented. So now that I've googled "cap rate" what kind of cap rate do you shoot for? For a bad, good or great deal? I'm sure this is market dependent but I am curious just to know what to shoot for? Thanks again!

Ned Carey · Answer

@Bob Bowling  You are once again making assumptions that I believe lead to mediocre investment results.

1) that everything sells at the market price

2) that the  market knows how to accurately value an investment.

The fact that the market goes through cycles is clear proof that the market is constantly under or  over valuing investments.

Fact: on any given property,  a higher cap rate (ie a lower price) reduces the risk and increases the profit.

J Scott · Answer

Are you saying that every property with a higher cap rate is riskier and less profitable?

Roy C. · Answer

@Ned Carey Ah I see your point. Yup I meant 30 years, sorry I wasn't thinking when I was typing. I def see your point after looking at interest rate for mortgage. I was looking from a new buyer perspective. I assumed this b/c I figured it's Casey's 2nd or 3rd investment judging from his story, but in your situation with a high interest rate, I can def see it's not a good deal. Thank you very much for your detail explanation. I was just trying to get my math straight, and this was a valuable practice lesson. Thanks again!

Ned Carey · Answer

Roy,

I calculated a 6.15% Cap rate. I just don't want to buy at that low a rate. I don't have to I can do better.

I figured $15,990 NOI. At that number and today's low interest rates it might actually cash flow very nicely. Perhaps a lot  better than your $200 a month.

The problem is you left out a lot of variables. You said 30 month mortgage. Did you mean 30 years? Where are you going to get a 95% mortgage? I can't get that. I am going to hold it in a LLC which in my market, for me,  means I can't get it  financed at all without a private lender. What interest rate are you figuring?

If you can get it under the terms you think you can, it could actually be a very good deal. Pending other due diligence, If I could get this with %5 down and a 5% rate I would jump on it. I know I can't get that.

Ned Carey · Answer

As @Bob Bowling points out Cap rate is in part affected by the perceived risk of a deal. People with lousy properties have to offer them at low prices which equates to a higher cap rate. They need to offer the higher cap rate, to attract buyers. Excellent properties attract lots of buyers and can be sold at high prices ie. low cap rates.

So what is a good cap rate? That depends on your risk tolerance and your goals. Also is the property operating at it's optimum or is there opportunity to increase income and /or decrease expenses. Is the property in an area where there is high probability of increasing rental rates?

So cap rate is a combination of the right type of property for you needs, premium A class vs a D class property, for example. This will set a range of cap rates for the type of properties you want.  Then the question becomes what is a "Good" cap rate for the specific property you are looking at, given it's risks and potential rewards?

Casey Young · Answer

So if I could get that financing this would work well? (I only have one mortgage, good income and credit so I would speculate that I can?) also I realize I left out taxes they are 190/month

Account Closed · Answer

But @Ned Carey, the lower the cap rate the less risk AND more profit is perceived by the market.  You can buy a riskier and less profitable property at a higher cap rate but why would you?  Does your 50% only include operating expenses like you would use to calculate a cap rate?

Roy C. · Answer

@Ned Carey O the result I was getting is after 50% rule, taxes, and other expenses. (I made a spreadsheet based on some of the example spreadsheet that was on the site) The reason why I am asking is I want to see what's your def lousy deal and compare with mine, because I am still learning how to distinguish good deal from bad one. Thanks Ned!

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