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Updated over 9 years ago, 05/11/2015
First Rental - 4% Rule Quick Opinions Needed!!
I am looking for some quick opinions on the deal below. Can I really go wrong with this?? I have submitted the contract and just waiting on the seller to sign but we have already agreed verbally.
I have been looking to buy my first rental property for a long time and came across a listing for two duplexes for $35,000. You are reading that correctly, 4 units, $8,750 each. Rental rates are at $350/unit ($1,400 gross or 4%), with taxes around $1,100 annually and insurance around $1,000 (quoted by seller, not sure if accurate). There is one tenant who has been there for about 3 years who takes care of the yards for $50/mo, so taking out fixed expenses the net is about $1,175. After another 10% for management and a vacancy factor of 10%, even though the property has not had a vacant unit for over 5 years, and net rents are around $895.
To me this looks like an NOI of around $10,740 indicating a cap rate of about 31%. I'm sure you're wanting to know how this is possible.... well, they are in the hood. Low income area, probably crime-ridden. Not stereotyping here either, I pulled the street on crimereports.com and there are literally break-ins on the same street within the last week. Should this stop me though? I'll never go to the properties unless a tenant moves out since they are about an hour away but I really don't see any need to. Most are long-term tenants and the seller said he has only had a few turnovers over the six years he has owned it.
In addition, both duplexes were re-plumbed (new supply lines), rewired, and had new windows put in, all in 2008. All separately metered and tenant pays own utilities. They both have metal roofs (not sure of age, seller guessed 20 years old) and there is no central a/c, just window units, and they are owned by the tenants, meaning no responsibility on my end for those.
Lastly, I negotiated 70% seller financing on the deal so I am only going to be out of pocket $10,000! 5 year term, fixed at 8% so payments are about $500/mo. With net rents of $895 I would be cash flowing $400/mo. ($100/unit) with only $10,000 out of pocket.
Can someone please snap me back into reality here. Where are the negatives to a deal like this?