Please help me analyze this deal

[Mayer M.]

Hey Guys!

I am planning to buy the below property cash and immediately turn around and do a cash out refinance to get 100% of my money back. Can some of you pros help me analyze this deal?

Year Built: 1960

Roof was replaced in 3 stages. Upper main roof first half replaced 8 years ago, second half replaced last year, and lower roof was replaced last month.

4 Separate Crown Aruba Gas Boilers, regularly serviced and approximately 20 years old. 

4 Separate Gas hot water heater (ages vary)

Washer Dryer hookups available in basement for coin laundry for additional income

Exterior painted two years ago

Vinyl Siding

Property just passed state inspection

Replacement energy efficient windows

Purchase Price: $210k

Appraised Value: $285k

Property Type: Quadplex/Turnkey tenants in place

Area: B

Units: 1-3BR, 3-1BR

Rental Income: $3365 Per Month / $40,380 per year (rents can be raised 5% upon lease renewals)

Utilities: Separately metered, each tenant pays their own gas and electric

House Utilities: Common area utilities are about $20.00 per month

Water/Sewer: Landlord pays water sewer at $125 per month

Property Taxes: $7855 per year

Insurance: $2500 per year

Landscaping/Snow removal: $1221.00

Vacancy: ???

CapEx: ???

Capital Improvements: ???

Can you help me out with analyzing this deal? The plan is buy cash and immediately cash out refi to get 100% of capital back. Thanks!!!!

[Patrice Penda]

Hey @Mayer M.
First question is : How come you are getting it at 210k if it appraised for 285k ?
That is a key factor here in you being able to refinance quickly

[Mayer M.]

Seller is moving to Florida and has already lined up property there to buy so he wants to unload quickly

[Patrice Penda]

It is a great deal! Maybe too much a great deal (which makes me wonder whether it is real)

You would be able to easily refinance it a 75% LTV

With a 75% LTV mortgage and accounting for 10% vacancy and 5% capital improvement (which is conservative), you would get 10% return on your investment.

Mayer, I found it hard to believe that you need help here.

Is this a trick question? 😊

What is the part you need help with ?

[Mayer M.]

Hey Patrice,

I think I was just also feeling like it’s too good to be true and maybe I was missing something.

Turns out it was. Found out today less than desirable tenants, one tenant is moving out, Lots of deferred maintenance, and my contractor thinks they’re covering up things.

As it sits still makes a pretty good deal, but because of these factors I’d rather just pass.

[Patrice Penda]

Hey @Mayer M.
Alright. Now it makes sense!!!

[John Leavelle]

Howdy @Mayer M.

Wow! Those property taxes are a cash flow killer. Normally I go into a deal using a very conservative 55% for expenses. If I use individual categories of Vacancy - 10% ($336.50) , CapEx 10% ($336.50), Maint./Repair 5% ($168.25), and PM 10% ($336.50), plus your Tax ($654.58), Insurance ($208.33), and Lawn care/Snow Removal ($101.75) it totals $2,142.41 or 63.7%. Lets say you purchase for $210,000 cash and do a delayed finance mortgage based on 75% LTV at 4.5% APR/30 yrs. $285,000 * .75 = $213,750. So a loan of $210,000 at 4.5% = $1,064 P & I.

Cash Flow = $3,365 - $2,142.41 = $1,222.59 NOI - $ 1,064 = $158.59 mo/$39.65 per unit

Not very appealing.

Adding the additional information about tenants and property conditions it really looks bad. 

Good decision to pass.

[Mayer M.]

Agreed. Thanks

[Patrice Penda]

Originally posted by @John Leavelle:

Howdy @Mayer M.

Wow! Those property taxes are a cash flow killer. Normally I go into a deal using a very conservative 55% for expenses. If I use individual categories of Vacancy - 10% ($336.50) , CapEx 10% ($336.50), Maint./Repair 5% ($168.25), and PM 10% ($336.50), plus your Tax ($654.58), Insurance ($208.33), and Lawn care/Snow Removal ($101.75) it totals $2,142.41 or 63.7%. Lets say you purchase for $210,000 cash and do a delayed finance mortgage based on 75% LTV at 4.5% APR/30 yrs. $285,000 * .75 = $213,750. So a loan of $210,000 at 4.5% = $1,064 P & I.

Cash Flow = $3,365 - $2,142.41 = $1,222.59 NOI - $ 1,064 = $158.59 mo/$39.65 per unit

Not very appealing.

Adding the additional information about tenants and property conditions it really looks bad. 

Good decision to pass.

[Patrice Penda]

I disagree with your analysis @John Leavelle

I think by NJ standards, this is actually a very good deal.

I see you are based in Texas and comparing the taxes on that property to what you would normally pay in Texas.

But you shouldn't. NJ is the state in the country with the highest property taxes.

7.8K in property tax in NJ is not extraordinary

If @Mayer got at 210k cash when it is actually worth 285k. He could almost immediately refinance and pull out all of of his initial money and still be left with a cash-flowing property.

If you look at your assumptions which are very conservative which is good. Even after accounting for Capex, maint/reserves, property management, insurance, at that price, the owner of that property would still come on top

AND this is with no money invested in the deal.

Does it worry me that the expenses/income ratio is above 55%? No, not at all! The property is cash flow positive,  it is in B neighborhood and I have no money in it!

I don't know about your area, but by NJ standard, this a good deal in my opinion. I would take it for sure @Mayer M.

[Patrice Penda]

Just  to clarify! I would take it just based on the numbers given
It is almost too much of a good deal that it would make me wonder what is the catch.

In which case, I could pass if I discovered that there are hidden liabilities or issues coming with the property, which might explain the price

[Mayer M.]

Very well said Patrice!!!

[John Leavelle]

@Patrice Penda

I would not argue your point about the tax in NJ.  I’m just glad we do not have the same high rates.  And yes, I realize there is a difference in cash flow expectations between “B” and “C” areas.  However, my concern is with the deferred maintenance/condition of the property.  The indication is a larger cost amount than @Mayer M. may be willing to cover.  This additional cost would not be immediately recoverable with a refinance loan or through improved cash flow (questionable tenants).

As you say that is not my market.  If under $50 per month cash flow is commonly accepted, then, I know I would not be investing there since Cash Flow is my primary criteria.

Best of luck to you.

[Patrice Penda]

@John Leavelle
I agree with you on the deferred maintenance. It is an important thing to consider thing to consider.
Maybe the tenants are tenants of hell? I don't know. Maybe there are some hidden liabilities coming with that house? I don't know either.

But regardless of the size of the cash-flow which is not huge by any stretch of imagination, just based on the numbers and at that price and providing that I can refinance the purchase quickly, the way I would look at, is almost as if the owner was gifting me the property.

Would I accept property gift from anyone even if the property doesn't cashflow superbly? Yes for sure