First Deal.... how does it look?

Question

Hello all,

Very strongly considering this deal as my first rental.  But I want some people's advice here first.

It's going to be a rental property.  Multi Family Home with 2 units.  Each unit has a living room, dining room, kitchen, 2 bedrooms, and 1 full bath.  Each unit is 900 sq feet.  Shared basement with separate storage areas.  Shared laundry area in basement.  2 gas meters, 2 hot water heaters, 2 furnaces.  Seems pretty clean.

Asking price 102,000.

My offer 100,000.

Current rents in the area are $600-800 per unit.  So I'm lowballing my estimates @ $650 per unit = $1300 per month.

Putting 20% down and taking a 30 year mortgage out for the remaining 80k.

Non Homestead taxes are $4400 per year.  Insurance $1700 per year.

So monthly expenses look like this:

mortgage + taxes = $731

Insurance = $142

Vacancy 5% = 65

Repairs 10% = 130

Cap Expenditures = $50

Total = $1118.

This is in a very trendy up and coming area in Michigan and I fully expect rent and property value to go up over the coming years.

The risk is that it's an old building, about 90 years old.  Something big may happen one day costing me a lot to fix.  Of course I will be having a thorough inspection.  However plumbing and electrical were all updated about 10 years ago.

So how does the deal look?  Any advice much appreciated.

Danny

Dan Maletta · Answer

@Danny Akkerman

Assuming there is zero fix up costs. Here is how we would run the numbers for all of our deals. Difference here is we do 10% vacancy and 10% CapEx.

Purchase 100k

Debt Service on 80k

Monthly Rent:      $1300

Taxes:     $367

Insurace:   $90 ($35-$50 per unit)

CapEx:                  $130 (10%)

Maint:                    $65 (5%)

Vacancy:               $130 (10%)

NOI = $518

Debt service = $417 (80k at 4.75% for 30 year)

CASH FLOW: $101

We are always looking for $200 cash flow per unit. However, we invest in Waterloo, Iowa which is a low to middle income area and our strategy is based on the highest cash flow possible, but we know our properties are not going to appreciate much. So it really depends on your strategy.

If this deal is not right for you, just move on! Don't force it to work. I promise you will find another.

P.S. I agree with @Moshe H. old buildings will have more CapEx. I think you need to budget up for that.

John Aloisi · Answer

Danny,

We're actually closing on our first investment property this week, so I'm not an expert by any means. But here's my 2 cents. If I'm reading you correctly you're looking at $182/month cash flow. That seems a little low in light of your initial investment ($20k+).

I wonder if you could do better on your insurance. We shopped around quite a bit and ended up going with Affinity/REIGuard offered by the National Real Estate Insurance Group. http://reiguard.com They specialize in insuring investment properties, and my guess is they could save you at least a few hundred a year. (I have no connection to REIGuard except as one of their new customers.) So far we've been happy with them. They allow up to 60 days without renters before you have to change your insurance status to vacant (higher rate). And they do monthly billing directly to a credit card. So far we've found them to be more flexible than other insurers and they definitely beat the quotes we were getting from more traditional insurance companies.

Owen Rosen · Answer

Have you shopped the insurance?  Depending on the area that could be high.

Account Closed · Answer

Owen,

I total agree with you regarding the importance of a local agent. This seems to be a minority opinion on these forums. I typically quote around 10 properties a week. For each property I  generally get a quote from three carriers. This gives me a feel for the pricing and coverage trends in my area that a national agent could never replicate. Pricing varies significantly by region and insurance companies underwriting practices and appetite vary by region. It is impossible to be in tune with every market. For example, in some regions a wind hail deductible of 5% is common while in others a flat $1,000 deductible is still prevalent.

National Real Estate Insurance Group is basically a surplus lines broker that has marketed themselves a rehab insurance agency.  They mention Acceptance Indemnity, Lloyds and Ironshore on their website which are all carriers your local wholesaler has access to. Using surplus lines carriers allows them to be flexible regarding property valuations and reporting forms but this flexibility comes at a price. As you mentioned these companies can do funky things like provide basic perils coverage.

Owen Rosen · Answer

John - I am working with a client right now from this board that has insurance through the company you mentioned.  His policies are all written completely wrong and with basic perils coverage only.  That is something we only do when you cannot qualify for comprehensive coverage.  I am going to end up moving his entire portfolio over to our agency with no overall increase in cost with dramatically better coverage and lower deductibles.  I would be VERY skeptical of REIguard.

Ryan Parnow · Answer

Who does the lawn and the snow removal?

You should include management expenses even if you plan to manage it yourself, because someday you might want to hire a manager (or have to).

$50 a month seems low for cap ex for a building that old.

Owen Rosen · Answer

100% - those carriers are last resorts - not preferred options

Owen Rosen · Answer

@johnaloisi Nothing is a problem until it's a problem...the gentleman I'm working with was pleased as well but he hasn't had a claim.  The policy you have might be totally fine I'm only going off of what I've seen and my own experience.  I wouldn't know the first thing about the market in Utah or Iowa - it's unrealistic for them to have expertise in every state and market.  We have multiple carriers that we shop around with and some companies are better than others depending on the needs of the client!

John Aloisi · Answer

@Owen Rosen That's interesting. I've only heard very good things about REIGuard from other landlords.

Owen Rosen · Answer

For a better idea of what I was referring to, I've attached a helpful guide of perils that are covered on certain types of policies.  This is just a general guide but the policies I've encountered from ReiGuard were all Basic only.  Not good unless forced to take.

First Deal.... how does it look?

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