Condo in Mesa, AZ Deal Analysis

[Paul G.]

So,

I'm (finally) under contract and the seller has accepted my offer.  Here are the details

2bed / 2bath 1000 sqft 

Purchase Price: 98K, Seller paying 2K towards closing costs

HOA: $175

Vacancy: 1/12 (8.33%)

Taxes: $400/year

Insurance: $450/year

Debt Service: $390 (25% down)

Maintenance / CapEx: 5% of Rent: $495/Year

All Expenses: $675

Comparable rents in the area: $900 (same complex), with some upgrades could get to 950-1000.  But for this analysis I'll use $900 because I know I can get it.

CoC: 6.6%

Cash Flow: $150

DSCR: 1.38

GRM: 9.07

So, I know, not GREAT numbers.  But things have been flying off the market for my properties that I'm interested in.  I've lost about 8 properties so far, and while this isn't great, it's definitely in a good location with plenty of upside.  Here's the rub.

There is a renter already in the unit.  She's paying $740 a month, on month to month with no current contract and would like to stay if possible.  She knows that rent will be increasing, but she can't afford too much more. (This is probably the main reason why it hasn't gone off the market).

As I see it, since she's currently there, I was going to keep her at $740 until Dec 1. During that time, I would let her know that the rent on Dec 1 will be increasing to $850 a month. If she stays, then I technically have a 0 vacancy rate with Cash Flow of $170 starting in December (and CoC of 7.4%). For the first 2-3 months, I would only see a Cash Flow of $50ish (which sucks). But, I don't have to do any of the major upgrades that I was planning (floors, electrical, counters, paint) immediately and can get positive cash flow immediately.

If she decides to move on, then I make the improvements and put it back on the market at $900-$950 within 2-3 weeks. and get what I talked about above.

So.  I guess my question is.

1. Knowing the market is extremely hard right now (for those not investing full time, and not coming in all cash) is this a decent enough deal?

2. Would you keep the renter in there using my information provided above.

[Kuba F.]

If you're planning on holding it for more than 5 years then 5% capex is inadequate.  Over 27 years for example you are likely to need to cover over 75K+ in expenses, whereas at 5% of receipts and 3% rent growth rate starting at 900/mo you're only likely to reserve 20K....so your reserves should be closer to 20%. You're starting off in the red, your only option to be the least in the red is to raise rents as much as possible as fast as possible.

Using your numbers and some other assumptions such as starting at 900/mo rent I get a 7.24% IRR. Changing to 20% reserves changes IRR to 4.47% over 27 years with a 2% appreciation rate.

Your appreciation rate might be higher which could help.