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Updated about 7 years ago on . Most recent reply

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15
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1
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Mar Now
  • Real Estate Investor
  • Westchester, IL
1
Votes |
15
Posts

Comparing two properties

Mar Now
  • Real Estate Investor
  • Westchester, IL
Posted

I have a question about comparing a property I own to one I have the opportunity to buy.  I want to evaluate if the second is a better deal, and if so, maybe I will sell the first.  

I own a SFH worth $350k with no mortgage. HOA, taxes, ins and property management fees are $450/mo. and rent is $1700. I've had it for 15 years and just haven't revisited selling it.

I am interested in purchasing a multifamily building which needs rehab work.  Purchase price $450k, rehab costs $120k, but expected value $710k.  Rents would total $5200/mo. I would possibly put 20% down, mortgage, tax, ins, mgmt fee = $2500.  (Kind of oversimplified, I know I'm ignoring repairs, vacancy, etc. for now)

So to compare, would I use cap rate?  If so, on what I paid for each  or on the final value?  The first was purchased so long ago that it's initial price doesn't seem relevant anymore. I'm worried I'm just not getting enough rent, that the money could be better used somewhere else.  

Thanks.

Most Popular Reply

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83
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39
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Derek Kirkwood
  • Palmdale, CA
39
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83
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Derek Kirkwood
  • Palmdale, CA
Replied

@Mar Now

If you apply the 70% rule to the multifamily, the max you would offer would be $377k.  So buying it for $450 is pretty far above that.  

The other problem I see is neither of these properties reach the 1% rule of monthly rent to purchase price: 5,200/710,000 = 0.73%, 1,700/350,000 = 0.49%. Refinancing either of these will kill the cash flow. You can only do about 65% LTV on the house before you hit negative cash flow, and about 60% LTV on the multifamily.

Pulling 75% LTV out of the house with the HELOC will lead to negative cash flow, which is why @John Leavelle suggested this as only a temporary situation that you pay off as quick as possible with the refi of the multifamily.  

Maybe a better way to look at this decision is this:  You have 1,250 monthly cash flow coming in right now.  If you sell the house and walk away with $325k after costs of sale, can you then invest that money in other deals to generate 1,250 OR MORE per month cash flow?

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