1st Property - Analysis Paralysis?

Question

Hello BP. This is my first post but I have been following the forum for a few weeks now. I am a new investor in the Philadelphia area interested in Buy/Hold with multi family dwellings.

The deal I'm considering is on a duplex in a strong rental neighborhood. Each unit is 2 bedroom/1 bathroom that have been renting for the past several years at $900/month. The work necessary on the home after purchase is a roof which will run me $4,300 as well as some minor cosmetic touch ups.

I could close on the deal at $205,000. The comps in the area are roughly the same. With a conventional mortgage I'm looking at about $1,360/month including insurance, PMI, and taxes. I'll have to put about $18,000 down including closing costs.

My worry is not having any equity built into the deal. It's difficult to find rehab properties in the area. I'm not sure that positive cash flow at $400 a month is a safe enough bet.

I would love input on this deal as the seller is ready to close early this week and have other offers slightly lower then what I am offering.

Thanks BP!!

Aaron Montague · Answer

@Nicholas KurowskiIt is good that you brought this deal to the forums, as it is a BAD ONE FOR YOU.Get away from this deal now!!Here are the numbers as I see them. We can argue small semantics, but never do a deal just to do a deal.Mortgage Rate 5.00%Length of Mortgage in years 30Monthly Mortgage payment $1,054.05 (made up, but PITI comes out to $1360)Taxes $206.67(made up, but PITI comes out to $1360)Sewer and Water $83.33 Trash $25.00 Heat/Utilities $- HOA $- Cap Ex and Ops $150.00 (this is for everything from shovel the walks to the eventual water heater and roof replacements. You need to put these funds aside now so they are there en masse when big stuff breaks later)Insurance $100.00(made up, but PITI comes out to $1360)Mgmt Fee $180.00 (you might self manage, but at some point you aren't going to want to. Plus you should be paying yourself for your work)Vacancy $145.80 (1 vacant month/apartment/year)Total Expenses $1,944.85Total Revenue $1,800.00 Cashflow/month $(144.85)Cash on Cash Return-9.85%

Mindy Jensen · Answer

Possibly the best piece of advice on this whole site...

Nicholas Kurowski · Answer

Thanks everyone. The monthly expense includes insurance, PMI, and taxes as well as the principle and interest. Management will be handle by me (I work a four day on four day off schedule). As for the money down, I've been approved at only 5% down for my first property as I only rent at this point. I'll keep looking. I appreciate your input as I was on the fence. I am still new to this and am continuously educating myself. The input you all provide is priceless to a newbie and I'll will benefit because of it.

Mitch Rice · Answer

Once costs such as vacancy, repairs, and capex are calculated, this property will be negative cashflow. A good rule of thumb is that your expenses will equal about 50% of gross income. The remaining 50% is left to cover debt service (just principal and interest, taxes and insurance are expenses). Whatever is left of the later 50% after debt service is your profit.

Greg Zelner · Answer

I'm sure some of the investors on here will have a different approach. I use the 1% rule for buy and hold. Meaning I expect to earn at least 1% of the purchase price in monthly rent for the place. If you can find a property which brings in 2% per month you're doing great, but you have to try pretty hard to find that.Like someone else said earlier, be careful of underestimating rehab costs. We did this on our first house and almost lost our shirts on it. If you know how to do the work, you might be able to save yourself half price on roofs, plumbing, electrical, etc... with owner-builder permits. (I'm not sure what the regulations are in your county so you may need to check that out first). I work in the construction industry and it's still easy to underestimate the total cost of rehab properties. If you're ever unsure on what a property is worth just take your (purchase price- total cost of rehab work) x 1% and see if you are guaranteed to collect at least that in monthly rent. If you can't do that, then you're paying to much and the risk is not worth it. Also don't forget to consider the time value of money. If you're going to have 6 months of vacancy during the rehab process you should consider either paying considerably less or finding a better deal somewhere else. (What I'd probably do is calculate carrying costs over that time period and lower my offer by that amount).I'm a newbie too getting ready to purchase my 2nd revenue producing property in my first year. So if anyone else has recommendation of a better way to estimate these costs I'm happy to hear it.

Aleksandar Popivoda · Answer

Your projected annual Gross rental income, calculated with a reasonable 10% vacancy rate, is $19,440. Your debt service, plus insurance and tax, is $16,320. So you have $3,000 left during the year to take care of maintenance and repairs plus capex. This looks like a great candidate for cash flow negative property.

Leandro Rodriguez · Answer

what is your goal? Equity or Cashflow?Seems to me that the deal will cf just fine at $400/mth.Can you do something extra on the improvements that will increase value of propertty ? BUT! is your cash flow calc right? I don't see you mentioning insurance, maintenance, management, taxes?Make sure you are REALLY cash flowing.

Account Closed · Answer

Pearls of wisdom on this thread!...love it!

John Thedford · Answer

Walk on this one. Don't be in such a hurry to buy that you buy the wrong deal. Keep looking until you find the right one. Buy strictly on the numbers and no emotions.

Rafael Floresta · Answer

The roof price is actually high. 15x45 leads me to think it is a flat roof, and I usually pay between 1600-2000 for a new flat roof. @Nicholas Kurowski I am a investor and a licensed real estate agent in NJ. I am working on getting my PA license. Philly has lots of distressed properties, and I would try to find something you could get a head start on equity. That way, in a year you would be able to go get a HELOC and tap into your equity to fund your next deal. If you want some help, lets grab a coffee and discuss the details of your situation.