Would You Make This Deal

[Cabrin Mills]

Hello BP, My name is Cabrin Mills and I'm an investor here in Kansas City. I am currently negotiating the purchase price on two properties, for the purpose of wholesaling. Both of theses properties are multi-families. I have had some experience with SFR but not much in the MFR arena. I'm looking for some feed back from someone who has had success in MF investments (especially in Kansas City, KS), to give me a little more confidence in finding a buyer when we finalize the agreement. I ran the idea by a couple investors and they seemed a little hesitant, so although these seem like really good deals to me, I would like some confirmation before I pull the trigger. The purchase price (since we have not yet come to an agreement) is the price that I would assign the contract for. Thanks for any feedback and advice, I really appreciate it.

Deal 1

4-plex

-(2) 2bed 1bath units; Rents for $750/mo ea. (Main building)

-(2) Studio units; Rents for $500/mo ea. (Rear building)

The 2, 2 bed room units, and one studio unit has been fully rented for the past 3-4 years, up until a recent double eviction in the main building. The last studio unit has been rented on and off throughout that 3-4 year time frame. There is currently one tenant remaining in one of the studio units.

Purchase Price: $55k

Est Rehab: $10k

Market rent: $2500/mo

Insurance: $50/mo

Taxes: $115/mo

Management (10%): $250

Maintenance (2%): $50

Vacancy (5%): $125

Net Cash flow (50% Rule): $1250/mo

Cash on Cash Return: 23%

[Andrew Johnson]

@Cabrin Mills I think the first step that I'd undertake (in your shoes) is asking what they actually rent for today.  To me looking at "market rates" is a great way of looking at potential.  But if you see a market rate of $750/month and they current rent for $350/month (completely making this up) then there's a head scratcher.  It just wouldn't seem logical to assume that with rehab you could double rent.  I know "double the rent" sounds hyperbolic but someone else a couple of weeks ago had a similar posit.  It turned out they were using some sites to estimate rents rather that looking at the rent ceilings that were present in the neighborhood.  

My perspective in bringing this up is that if I (as an investor) see what I think are delusional numbers in market rents, underestimated rehab numbers, etc. I just throw out the whole deal.  I don't give it a second thought, it gets deleted, and I basically ignore any further emails from that wholesaler.  Why?  It's not worth my time to look at bad/delusional deals.

That's not to say that yours is this way or that other investors don't take a more open minded look but I don't.  So all of this boils down to:  What does it rent for today?  How did you arrive at your market rent numbers?