First Deal, Analysis and Progress

[Alex SImon]

I've been lurking about for quite some time and now I think I've finally got my first deal in the works.  Nothing is final yet,  but the initial offer is being submitted and we'll go back and forth a bit on the price.  The property is a triplex in Leesburg, FL, fully rented and in good condition after the initial inspection, no big maintenance issues that need to be addressed besides some fresh paint.  The neighborhood is good, and the renters in that building have been there a good long while.  While the house was being shown, a neighbor came up unsolicited and asked if there was a vacancy because he had a couple friends who'd be interested.  So provided he's not a shill, that's a pretty good sign that vacancy won't be an issue here.

Numbers!

Price:  100k, which is the highest I'm willing to go on this particular deal.  Asking price is 120k, I'd like to get it for 90k.  I've put together a set of figures for 90 and 100, but I'll just post the 100k figures for now in case I can't get it any lower.  As you can see, the initial numbers for this house are pretty modest.

Gross Rent:  1200 (Way below market value for the area, over a few years we can easily increase this to 1600)

Monthly expenses (Taxes,  10%Property Manager, Insurance, and 10% Repair estimate): 600

20k down payment (not including closing costs in this calculation)

Annual NOI excluding mortgage: 7200

Cap Rate: 7.2%

Monthly mortgage: $382

Cash on cash return: 13.08%

Fast forward two or three years, rent increases to 1600 a month. Now the monthly NOI is $1000, a cap rate of 12% annually with the annual cash on cash return jumping up to 37%. Sounds very good on paper, and everything I've seen of the unit is very promising.

[Alex SImon]

@Bob

Yes, you're asking questions that need answers.  But rather than try to explain anything to a self-professed newbie or help in any way, you just come out swinging with the Caps Lock doing your best to make me feel like an idiot, which is kind of a jerk thing to do.  So, thanks.  I am an idiot.  We can all sleep well at night knowing that the newbie has been properly chastised for not knowing something.

Now that we've established that, at great length, can you explain why it's *so* terrible to try and get this property for lower than the asking price? I didn't think investors were generally in the habit of trying to buy a property at a mark-up. Maybe I've grossly misunderstood something. It wouldn't be the first time. But as for why I'm interested in this property? The numbers on paper come out in the positive by about $200 even at the start when the rents are a bit low. *Why* is it so horrible that the gross annual rents come out to a quarter of my optimal buying price? Is it supposed to be less? Is it supposed to be more? You've implied both of those extremes and now I have no idea what you're even asking anymore. These are things I haven't seen on any of the articles, podcasts, webinars, or blogs that I've read/watched/heard/absorbed while researching REI. I'd love to know all this stuff, but I haven't seen anyone talking about it yet.

Why do I think it's a good deal?  Because I ran the numbers according to articles like this one:

http://www.biggerpockets.com/renewsblog/2013/01/19...

Is that wrong?  Is it right?  Have I been following some outdated or outmoded model of how to figure out the cashflow numbers?  These are all serious questions because I obviously don't know what's what.