Need help analyzing a deal

[Casey Charkowick]

My brother and I are looking at a two-family in a town with a very reliable tenant base. Renting this property will not be a problem.

List price: 289K

Offer price: 275K 

Reno Costs: 30K

Expected Income: 2400 - 3000 (total for both units, garage has storage rental potential, but not considering that for analysis)

Monthly payment: 1600 (mort. tax, insurance)

We are planning to put 25% down to secure the mortgage, and finance the reno ourselves. With the expected income, it will take us 3 years to pay off the reno before we will start cash flowing. All the numbers look bad, aside from the longterm rental income and the potential flip value. 99% of all two family homes that sold in this town in the last 180 days sold at or above list price. 

We are thinking of putting an offer in tomorrow, but I've been dragging my feet for a week. I've been looking for my second investment property for over a year, and I know I need to take action, but none of the deals I've found are home runs. This one is the best I've seen and I suspect it will be gone by COB tomorrow. 

Thanks! 

[Anthony Thompson]

@Casey Charkowick I think you need to do some more research to narrow down your expected rents a bit more - the range $2400 to $3000 is pretty wide, and makes a big difference.

By my estimation, it's about a 2% cash on cash return if the rents are $2400/mo, and about 5.5% if they're $3000/mo, with debt service coverage ratios of about 1.18 (bad) and 1.48 (very good), respectively.

If the realistic expected rent is $2400 I would not do this deal. I like the DSCR on the $3000 rent scenario, but the CCR is still kind of meager. I'd only do that deal if you really liked the house/area/tenant quality and didn't mind a mediocre return.

I would urge you to be realistic in your assessment of the potential rent and not convince yourself you could get more than you could realistically get. I would seek several sources to converge on a realistic rent #.

And above all, try to get past the fear of missing out. Just because properties are going fast and lots of other people are buying doesn't mean you need to buy, if the #s don't look good for the amount of work and aggravation involved.

A good article I read recently was Impatience: The Pitfall of Every Ambitious Person. It reminded me that in 2006 people were falling all over each other to buy property at prices that didn't make sense, with properties regularly having less than a week on market and above-asking prices.

I'm not saying we're at that point now, but it's worth thinking about when evaluating deals. Sometimes the best investment is no investment at all.