How is this deal

Question

I am under contract for 6 homes bought as a package.  Seller is doing a 1031.  All 6 homes are side by side on the same street.  The market here is pretty hot and sells very fast.  Also very easy to rent.  A similar home selling without a package deal would be close to 180-200K per my Realtor.  I am buying each for $166K.  Current owner has given my his 2014 profit statement and past lease contracts.

All six homes costs a total of 1,005,000 to close including all closing costs/inspection, etc

All 6 are rented at $1600 and all have tenants with leases ending in 2015 up to 2017.  All rental rates have increased about $100/mo with each new lease.

I have a 4.25 % 30 yr fixed on all 6 and a separate loan for each home.   Put down 300K.  Mortgage $700K.  Monthly costs for all 6 homes:

1. P&I - $3444, Principal $960.  So I take my real cost for the mortgage as $2479.  I am sure others will look at this differently

2. Total yearly = $14000 or $1150/mo

3. Insurance total $7200 or $600/mo

4. Management Fees $900/mo

Best case scenario without any major repairs is $9600/mo.  Fixed Costs above per month(not counting principal payment) = $5129.  Net income=$4,471 or $53652 for 1st year.

ROI on 300K down = 17.9%

These homes were bought for $125k 5 yrs ago.

Michael Win · Answer

Also, there is a similar 6 group of homes that just went under contract that is in a less desirable area on the opposite side of town, rents for only 1400, not growing as fast that asking was 30K more than what I paid for my group of homes.

I see so much potential in this deal.

The medical school is going up, there will be alot more health care professionals that would love to live 5 miles from UT/Medical area/Downtown.

Michael Win · Answer

These were my reasons for jumping in to this deal.

1. If this year net income is the same as last years (accounting for all income and costs) I would return 15% on my investment.  Not bad IMO.  I plan on raising rent on all the expiring contracts this year b/c they are on the lower rentals.  This should bump me up to 18% next year.  This area is 5 miles from downtown and people are replacing the old with new homes close to here.

2. I would not say these homes are turnkey.  I plan on putting in 10-15K each property is the tenants do not relet.  If I do this, I should be able to rent them for 2k/house

3. the Seller paid 80k/home 5 yrs ago and the market has not slowed down in this area.   I am confident that if I sell one of the houses right now, I could get 190K for them as is.   I have seen similar homes/age/size in this area going for 200K+ and staying on MLS for less than 1 wk.  I am sure I got a discount

4. Rental market for similar homes in similar areas are 2k+.  These homes are probably less updated and that is why there is a long wait list for similar properties.  You can't get any places in this area for rents less than 1600.  I have checked and the closest I have seen is 1800.

5. I have alot of $$ in the stock market and it was time for me to diversify.

6. My plan was to get 2 homes this yr, 2 next, and go from there.  This was a great opportunity to do it all at one and not waste any more time looking for one home at a time.  Plus I got a better deal per home than what has been selling.

7. Once I close, there is a renter not reletting and I am going to update this home for 15K (all wood laminate, update kitchen, new appliance, new light fixtures, new doors).  I will raise the rent to 2k and I am sure I will get 1800 minimum.  If I can get 2k, then these homes will easily sell for 220K+.   A home that rented for 2k just sold in less than a week for 230K listing.

8.  I do not need income right now which makes it easier to take risks.  I plan on putting alot of the profit back to update each home once a tenant leaves.   My goal is to take the current 45K in new profit and keep 30K and put 15K back in updates.  in 1-2 yrs, I can buy another property.

9. In 5 yrs, if everything goes well and I can sell the homes for 230K, my principal per home should be about 100K.  With the 130K, I would do a 1031 and leverage my 130K into a 400K Property (30% down).   Either 2 similar homes or a multifamily.  Multiply that by 6 and I could have 12-15 Homes/duplexes to rent.  My portfolio would be right at about 3 Mil.

Hopefully if everything works out I can retire in 10 years right at 50 yrs old.

I already have a 7 figure retirement but it would be nice to quit my job and travel on the property income without having to work another day.

Marian Smith · Answer

The discount off retail adds up with 6...even if your realtor is over optimistic. (Typically homes that sell on the MLS are gussied up for top dollar, rentals need 10k to get in the same shape.)  I would think having all houses in a row would give you an efficiency and more important, an ability to control exteriors.  There is a street near me with a bunch of duplexes owned by one guy and it is and always has been very nice.   He includes lawn care in the leases...not sure about watering, but mowing, edging.  Sounds like a great opportunity.  Tip:  when thinking about your evential exit remember, the best time to plant oak trees is 20 years ago.

Tyron McDaniel · Answer

I agree with Paul, if these are in areas where you have strong appreciation and your unrealized equity is closer to the high end of the range you provided then it looks to be good. But I believe you are also paying TOP DOLLAR because these are turn-key... however in Austin, finding qualified tenants isn't a major issue so I wouldn't pay that premium, personally.

Tyron McDaniel · Answer

I agree with Paul, if these are p

Josh Nix · Answer

@Greg Baker I think when he says "2. Total yearly = $14000 or $1150/mo" he meant to say taxes.

@Michael Win I didn't put a pen to the numbers but looks like a pretty solid deal to me good luck and congratulations

How is this deal

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