Help: Is this a good deal?

Question

Hi All, I just started out looking and came across this deal. Since it is going to be my first offer, I want to run this and get everyone's opinion to see if this is a good deal.

Goal: Rental then later BRRRR

Property Type: 2Bed 2 Batch condo, 2000 sqft with a single car garage

Location: South Jersey close to Philly

Association fee: 280/month, Prop Tax: 610/month -- so total fees close to 900/month

Expected Rent: 1800/month and tenant pays electric, water and sewer.

This is a REO, bank is expecting 136k. My offer would be 120k

Was able to view the property and my assessment so far is:

1. Need to replace Carpet 2. Need new appliances (Fridge, Washer, Dryer, Microwave and Oven) 3. Has popcorn ceiling. It is good through out the house but for in one room where it was cut.

Additionally the property is on second floor and also has an elevator in it.

So my estimate to fix the above is a max of 25K.

I would put down 20% and get a mortgage for the remaining.

Closing costs: 4000

So total from pocket = 24k (20% of 120k) + 25k repairs + 4k closing = 53k

monthly payments: 458 (30 yr loan at 4% on 96k ) + 900 = 1358 . This gives me a monthly cashflow of 1800 - 1358 = 442.

If I take the loan for the entire 120k monthly payments will increase by: 131, so I will still have a cash flow of 311.

Market value of comparable properties: 180 - 190k

Any advice would be greatly appreciated.

Kumar Gunda · Answer

Thanks Xeniya. I am taking this as an educational opportunity. I agree and appreciate the feedback from everyone. I found this deal with in a week of searching and it seems to be a pretty good one, so trying to look it from all angles to see if it makes sense. Flip definitely seems to be a better way of looking at it than rental. Now need to find out how quickly the units in this community get sold. The agent I talked to seems to always give diplomatic answers...

Xeniya McBroom · Answer

Hi Kumar, don't get discouraged! If the numbers are not working out for buy and hold, then just flip it. It sounds like a great flip. You can find another BRRRR deal, preferably with no HOA. Every property is unique and every deal has its own purpose. That's how I look at it.

Kumar Gunda · Answer

I see 3 risk factors here:1. Elevator 2. HOA 3. Higher Property tax.Not sure if I have consider Property tax as risk as that is the case in most of the surrounding towns. But it definitely adds to my cost, in case of vacancy..

Kumar Gunda · Answer

Andre.. Thanks for the replies.. appreciate it.. I was able to see the property and my assessment is if I get the right people it will not take about a week of rehab work, but I will definitely budget 1- 2 months. 2 months of vacancy will cost me around 2800 (monthly around 1400 HOA+prop tax+mortgage+insurance) and I will add it to rehab cost.

Andre P. · Answer

Ok, so my thoughts to your points.1. Utilities are the renters responsibility so don't factor that in.2. As far as insurance goes, external parts may be covered by the assoc. unless your tenant burns the place down, or some other problem originates in the unit they own. So in addition to their renters insurance, you'll need to get insurance as well - don't guess, get a quote, should only take a few minutes but I'm betting it will be more than $50.3. All those items (and associated %) are taken from your gross rent. Being conservative you should plan for 2-3 months of vacancy initially so you can get your rehab done then plan for 6% from then on (6% of 1800 = $108). CapEx/Maintenance can be lumped together to include any and all repairs/issues that you may need to address, again as a % of gross rent, peoples number for this varies, but let's say since it's a condo it will be lower, so we can use 15%, which is $270.So take your 1800 rent minus your PITI (1358), vacancy (108), and CapEx (270) gives you a cash flow of $64, before any insurance numbers which I again bet is going to be more than $50/mo. I would pass, I personally hate HOA's and avoid them like the plauge.If you're not sure how to analyze and understand the numbers of a rental, do some more research here before buying anything and getting underwater.

Kumar Gunda · Answer

@Mike - thanks for the advice. This is the first property I am analyzing and trying to make sure I am on the right path.I did think about "vacancy, cap ex, repairs/maintence, utilities if not seperately metered, insurance, etc" . Here is my thought process1. Utilities are metered seperately, so its the renter's responsibility2. Insurance: Since this is a condo, external parts are covered by the association. Renters need to take Renter's insurance, so is there an additional insurance I need to take? and if there is one, I am assuming the premium should be not less than $503. vacancy, repairs/maintenance & cap ex: This is where I am confused as to what % I need to allocate and how to determine that %. I am thinking as long as I can cover monthly fixed payments from other sources, I am ok. Zillow's foreclosure estimate of the property at 202k and regular estimate is at 220k even though I mentioned it as 180k, so worst case I can probably flip it. How do, I go about obtaining info as to how long its taking to sell houses in a particular community?

Mike Hanneman · Answer

@Kumar Gunda you need to stop right now and get a better hold on what income and expenses there are for rental properties before you get in way over your head. You are missing vacancy, cap ex, repairs/maintence, utilities if not seperately metered, insurance, etc... The income/expenses are vital to make sure you figure in all of them before moving forward.

Varma Adduri · Answer

It's % of rent, not ARV. We have to factor in A portion of rent for these to get more realistic cash flow numbers

Kumar Gunda · Answer

@Varma.. should I consider 6% of my offer value or ARV? for Maintenance, vacany & prop mgmt etc. Also, what does property management include? Is it the cost of an agent commission to rent the property out or is there anything else?6% of 120k = 720 - vacacy6% of 120k = 720 - maint9% of 120k = 1080 - prop mgmtso total = 2520 per year or 210/monthThis will bring the cash flow down to - 2280/yr (4800 - 2520) If BRRR, cash flow would be a negative of $50/month

Varma Adduri · Answer

Generally vacancy will be around 6%, maintenance is 6% and property management is 9%. If you plugin the numbers in bigger pockets calculator you can see the cash flow. Since ARV is 180000 and you are offering 120k+15k (repairs) + 4K (closing). There will still be around 40k equity As per your plan, If you BRRRR and refi for 180k you can get the unit with no money down (80% of 180k is the refi amt) If it still cash flows after refi then it's a good deal