I think this is a deal? New at this analysis thing...

[Alex DeBirk]

Hey everyone,

Thanks in advance for reading.

I'm new at this whole thing so I want to make sure I'm analyzing things all right. Please let me know what you think of the deal!

I am looking at a buy & hold duplex turn-key deal in the Salt Lake City Utah area (trying to put as many trigger words as I can in there ;-). The listing is for $259K and rents for $1800/month. I only know the property tax, so I opted for the 50% rule to see if it's one I want to look into further. Thus:

$1800 less $900 for taxes, insurance, utilities, maintenance/repairs, management, private money lending fees (?) etc.

I am guessing a cash flow of $200. Thus, I have $700 left for the mortgage. Assuming conventional loan with 4% interest amortized over 30 years and 20% downpayment, I get a mortgage balance of $146,622.87. Dividing by 0.8 gets me my offer of $183,278. My down payment plus assumed 10% closing costs puts my out-of-pocket at $54,983.58. The ROI is then only 4.36%. Pathetic!

Goal seeking the ROI in Excel to 8% gives me an offer of $154,800 and all in costs at $46,441.16. Zillow puts the Zestimate of non-rental units surrounding this one around $170K, although recent nearby similar sq. ft sales have been in the 240K range....

So basically even if I offer $100 less than they want, it's only a barely acceptable deal for me. Did I get that right?

Who in the world would accept that kind of offer? Any advice on how to approach the seller to increase my odds of picking this up when you know nothing about the seller? It's in a decent area and needs no repairs, turn-key, so it would be a nice headache free property to get my feet wet with. DOM is 79 days, so they may be getting more and more motivated.

Thanks!

[William Hochstedler]

Welcome @Alex DeBirk

A few things:

Any percentage rule is not an analysis tool.  As soon as you start breaking expenses out, stop using these quick filters and start working with actual numbers.  There are a bunch of analysis tools here on BP.  Look under the Analyze and Resources tabs.

You don't need to hit a home run or get Memphis-like returns (wink to @Curt Davis) in Utah county on your first deal.  I know several self-made-through-real-estate high net worth people who bought their first small multi a decade or two ago and kept at it.  And they did it up here in Logan where appreciation isn't anything special.  The keys are persistence, patience, and diligence.

Keep in mind, that rent doesn't behave like resale value.  In solid markets like Utah it didn't drop like property values in the recession.  It also ratchets its way up much more slowly in an appreciating market.  This is important for the long view.

I'd recommend talking to lenders immediately. Many banks have their own programs that differ from Fannie Mae and FHA guidelines with regard to PMI, LTV, etc. Go to a few national banks, regional banks, and credit unions and find out what products they offer. Depending on your situation (and if you are willing to occupy the property), there are products like 100% financing with only $500 down and no PMI at around 4% (Key). Mountain America has an investment loan at 90% LTV.

With nominal returns, your primary focus should be the property itself.  Do the major systems in the property have 10-20 years (minimum) left in them?  Are the units nice enough that cosmopolitan professionals would want to live there?  What about the neighborhood?

Look at yourself in ten years and compare locking in historically low interest rates, purchasing an asset that traditionally and consistently appreciates over time, getting some landlord seasoning started for future borrowing, and getting some real life experience...or sitting on the sidelines waiting for the phantom double digit returns in Utah county.  

Assuming you could get into a property like this with 10% down at 4.25% and it's conservatively worth $300K in ten years, you would have over $100K equity between appreciation and principal reduction even if your cash flow was $0.  This represents quadrupling your initial investment without even considering the tax benefits.  This is why real estate is such a compelling investment.

Not saying that this is the property, but suggest you really think about what your long term goals are understanding that it's never too early to get your feet wet, particularly if you are young.

Good luck!