Is This a Good Deal?

Question

Hi Everyone, I'm currently working with my father who is trying to close on his first real estate deal. He is not the most financially savvy and I've found myself in a make-shift financial adviser sort of position, but I feel this would be a good opportunity for me to learn the business and benefit him as well. Anyway, after much delay and shopping, we finally have our financing in place and can make an offer if a good opportunity arises. So here's my question: Is this a good deal?

Duplex and detached Studio Unit - Total of 3 Units - currently priced at $170k

Following information provided by my realtor:

Total gross rent: $1,800

Annual Income   $19400 (Buyer to verify)Annual Expense   $4500 (Buyer to verify)Income (before mortgage expense) $14,900 (Buyer to verify)

Tenant Pays   All Utilities, Water, SewerIncome Includes   Unit Rent(Expenses Include   Management, Maintenance/Repair, Insurance, Taxes, Vacancy Factor) - According to seller

Our lender wants us to put down 25% - Around $43k

Mortgage payment would be around $700, bringing our net income to around $6,500

If I'm correct this would be a cash ROI of around 15%?

At first glance these numbers seem solid, but there is also some factors that are discouraging as a potential investor.

#1: The listing only has one photo of the property. All units are currently occupied, but still... 1 photo.

#2: The listing has been up since August 2017 - Any and all potential buyers walked off after inspection?

As a virgin investor, I would really appreciate any and all feedback!

Thanks!

Ryan Mattson · Answer

@Hunter Locke Thanks so much! It's nice to have everything laid out so nice and properly

Hunter Locke · Answer

Here's my quick run through. Yes, numbers look good. Let me know if you need more help, goodluck! Sent PDF via PM.

Hunter Locke · Answer

Ryan, I'm digging into this for you now, expect a PM from me.

Ryan Mattson · Answer

@Sebby Gabre Madhin Thank you so much for the insight, I've been attempting to run some more in-depth numbers using information that I've gathered myself. It's difficult to accurately gauge the condition of the units and property as a whole however because my realtor informed me that an offer must be made in order to find out those crucial details and request that information from the seller; doesn't really make sense to me as this information could make or break the deal in terms of cash ROI. How am I supposed to know the value of the property and how much to offer if I don't know it's condition?

Steve Babiak · Answer

A multi-unit where tenant pays sewer? Is the sewer somehow connected to the water bill so that sewer billing is based on water usage? And if that is the case, then are there separate water meters for each unit?

I would be very skeptical of the expenses being so low - less than 30%; that might be for one single "good" year - don't ever expect to average much less than say 35% to 40% when things are well run and self-managed. If a property manager will be hired, that right there could add roughly another 10% to the expenses.

Sebby Gabre Madhin · Answer

Hi Ryan

I agree that this may be promising on first glance but I think that you need to get/give more information before deciding if this is really a deal.  I would take a closer look because this appears to meet the very crude 1% rule at rent of $1800 and pp of $170k, but I wouldn't call the ROI without more info.

The statement of "expenses" is too vague.  You should be able to easily get a breakdown of what the taxes and insurance are (and confirm by calling an insurance agent and checking online public tax records), but this is just the starting point.  To really know, you have to factor in other costs:

--any landlord paid expenses, include lawn care etc

--vacancy-- I also use 8% of gross rents as rough estimate

--set aside for capital expenditures- I use 10% as gross number, but to really know you if you should move this higher will depend on age/condition of roof, HVAC, and other major systems

--set aside for repair--again, I use 5-10 % but very much depends on how recent the  rehab is, condition of units, etc.  Also factor in your own/your dads "handiness" level.  My partner can handle most common repairs (plumbing/electrical/etc) so can shave off a % or two, but if you will be relying on an outside repairman for all, then you have to be honest and bump it up.

--always factor in property management even if you don't intend to use it, depends on your area but in mine can get a decent company for 7.5%, other areas are higher or lower.

you can use the BP rental calculator (look under tools), among others, to plug in these numbers and play with different scenarios.

You need all this to get an accurate cash ROI number and determine how much you want to offer.  After all is said and done,  I would VERY much agree with your caution in dealing with a unit that's been on the table since August---esp. in todays hot multi market--- I wouldn't completely discredit it (some of my best buys have been units that others passed on for whatever reason), but I would definitely dig deep before committing.

John Leavelle · Answer

Howdy @Ryan Mattson

Can your Realtor help with checking the property out?  How about verifying Market Value?

You need to know the condition of the property.  Is there any immediate Rehab needed?  If there were any official property inspection completed you should get a copy to see why other investors walked.  Do not rely on Seller provided data.  It is almost alway incomplete.  They want it to look better than it really is.

I doubt they have only $519 per month in expenses.  That’s only 28%!  Without a detailed breakdown of the expenses I would stay conservative and use 50% for all expenses (Vacancy, PM, Repairs/Maintenance, Tax, Insurance, CapEx, Lawn care/snow removal).  They did not include CapEx, right?

Using 50% drops your Cash Flow down to $200 per month/$67 per unit.