Should I stay or should I go

Question

I need your experienced input on a duplex I am trying to close on and would like to add to my portfolio as an "buy and hold" property.

The asking price for the duplex is 110k and the duplex needs about 15k in renovations.

I based my offer of 95k of the "value=NOI/cap rate" formula. The total rent I will get for this property will be 750 dollars per unit. Below is my value calculation and am curious if I should stay or should I go???

750X12= 9000 x cap rate of 10% = 90,000 dollars

I look forward to your input and feedback.

Thank you,

Erik

John Leavelle · Answer

Howdy @Erik Timmermans

For 2 - 4 unit multi family properties you need to use comps to determine the ARV (Market Value).  Not Cap Rate.

Second, you want your all in costs to be equal to or less than the ARV.  That is your purchase price, closing costs, rehab costs, and any Holding cost.  So in your example if the List price is the Market Value/ARV, then, you would be over paying for the property.  Because you have not included Closing or Holding costs.

You did not provide any financing information.  So I will provide hypothetical mortgage for an example.

Loan $76,000

Down payment $19,000 (20%)

30 yr /4.5% APR

Mortgage payment $385

Cash Flow Analysis

GSI $1,500 month

Operating Expenses $750 month (50% rule)

NOI = $1,500 - $750 = $750

Cash Flow = $750 - $385 = $365 month ($182.50 per unit)

So depending on what type of financing you get will determine how good your Cash Flow will be.  Right now with these assumptions you have very good Cash Flow.

If your data is correct you may not mind over paying for the property.  I would have my realtor run comps and rental market analysis on it to be sure. Do your due diligence to confirm your assumptions.

Bottom line is I would press on and put property under contract to do a more thorough analysis and purchase if everything is good.

Hope this helps.  :)

James C. · Answer

Erik,

Your price assumes that NOI = GI, so I would take that into consideration...

My numbers are below.

Note: When scanning a property I force 10% of and 10% on my invested funds, and look for a positive net cash flow number. If it looks ok, then I can do a more in-depth analysis. I'm always revising my scan process, and am open to suggestions. As you can see, for me,  this is essentially a break even proposition based on my scan.

Hope that this helps,

Jim

Acquisitions

Assumptions

Item

Amount

Vacancy Reserves % (STD is 10%)

10%

Purchase Price

$90,000

Repairs Reserves % (STD is 10%)

10%

Acquisition/Closing Costs

$1,500

Recoup % (Std 10% On and 10% of Money)

20%

Down Payment = 20 %

$18,000

Management (STD is 10%)

8%

Loan Amount

$73,500

Monthly Rental Income

$1,500.00

Interest (Yearly)

5.25%

Yearly Insurance

$2,000.00

Term (Years)

30

Monthly Condo Fee

$0.00

Payment

$405.87

Yearly Taxes

$2,000.00

Result

Monthly

Yearly

Notes:

Cash Flow (Net)

$15.80

$189.56

NOI

$746.67

$5,060.00

ROI

0.97%

Cap Rate

0.21%

APOD:

Income

Expenses

Taxes

$166.67

$2,000.00

Condo Fee

$0.00

Management

$120.00

$1,440.00

Repairs Reserves

$150.00

$1,800.00

Vacancy Reserves

$150.00

$1,800.00

Mortgage

$405.87

$4,870.44

Recoup (Cash)

$325.00

$3,900.00

Insurance

$166.67

$2,000.00

Other

Total Expenses

$1,484.20

$17,810.44

Erik Timmermans · Answer

@John Leavelle

Thank you so much again and I look forward staying connected. Let me know if there is anything I can do and appreciate the support and confirmations.

Thanks

Erik

John Leavelle · Answer

@Erik Timmermans

Sounds like you have a good plan.

As far as the HVAC and bathrooms go.  It's that pay me now or pay me later thing.  If they need replacing or updated I would do them in your rehab up front (if possible).  Helps justify the increase in rent rate.

Start looking for your refinance lender as soon as possible.  Find out their seasoning requirements.  You may be able to refinance in 6 months if you are lucky.

1% rule of thumb is applicable.  You ideally want rents to be a minimum of 1%, or better, of purchase price.  So you are good there.

Erik Timmermans · Answer

Hi @John Leavelle,

Thank you for your input and addressing your concern and sharing your experience. I've only been doing this since may and have 4 fix and flips and in addition to that will this property my second rental.

The financing I got is from a private money lender (investor). I am paying him a 7.5% interest which should leave me with 55 dollars cash flow per unit. I could increase the rent to 800 per unit as we're fixing the HVAC units and bathrooms. Not sure what your input is on that.

I am planning on refinancing this property after one year with a conventional loan. The ARV on this home is 175k so we should be able to put some money in our pocket after refinancing the property.

I just finishing listening to the @biggerpockets/48 podcast and they're referring to 1% rent rule on purchase price. If the rent is 1500 dollars per month for the two units I should be staying in the "safe zone" up 150k. Or am I now mixing two things together?

Thank you so much as I appreciate your time look forward to your reply.

Erik

John Leavelle · Answer

@Erik Timmermans

Congratulations on jumping in.

Now is where you need to be extra vigilant conducting your due diligence.  I strongly advise you to do 2 things.  Get your own Realtor and get comps for that area to confirm what the Market Value is for the property.  It is extremely important to get comps!  The second thing is to have the property inspected to identify any problems and identify life expectancy of major components.  You should also get a general contractor to walk the property and give you a bid on rehab costs.

Remember to never trust Sellers data (it is never complete).  Trust what you find in actual T12 and other documentation.

Could you please provide a little more info on your financing.  It concerns me given your new Cash Flow projection.  $55 per month or $27.50 per unit is below what I like to see.  That is very slim margins.  When purchasing the property I want a minimum of $100 per unit.  And have the potential for $200 per unit.  Is this a Hard Money Lender? Private Money Lender?  Down payment?  Term length?  Regardless you will need to refinance with a conventional loan in the near future to get a better cash flow.

Good luck.

John

Erik Timmermans · Answer

@James C. Thank you for sharing your numbers. I will put my numbers into your formula as I'm using an investors money for 7.5% interest. I'll will print out your numbers and use them for future properties. I appreciate your time.

@John Leavelle Thank you for your advice. I've emailed the realtor and accepted the counter offer of the seller and hope to have it under contract by tomorrow. These are the numbers thus far.

Loan: 102,000

mortgage payment $640 per month

Cash flow 750- 640= 110 ($55 dollars per month)

I wasnt sure what you use as bottom number for the minimum cash flow per unit.

I appreciate your time and input.

Thanks Erik

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