Need Help Evaluating Deal

[Toly Gins]

Hi,

I'm newbie investor looking to get my first deal and I need some help evaluating a property. I am a long time reader of the site, so I'm aware of the 50% rule. However, I haven't found much on evaluating townhouses and condos, since the HOA covers some of the maintenance that would be included within 50%.

I would like to qualify this by saying that I live in the bay area and SFH that are in decent areas are still too expensive for me to get any kind of cash flow. I am familiar with some of the negatives that people see in condos and townhouses, but the potentially lower maintenance along with the cashflow is attractive to me as a new investor.

Here is the deal:

-3 bedroom 1.5 bathroom townhouse
- short sale for 98,000k
-down payment 20k, investment loan for 79,000 at 4.3%
-HOA includes water, trash, hazard insurance and common maint. for $320 per month
-comparable rents in the area $1300-$1400

Analyses:

-50% rule gives $650.00 for all maintenance including property taxes.
- debt service is approximately $370.00
- this leaves approximately $280.00 in cash flow
- HOA fee is $320;however, how much of it should I include in the 50% maintenance?

If I count even half of the HOA within the 50% rule then it seems like this deal makes sense as I would still have about $120.00 in cash flow. Is this reasonable? I'm also counting the rent at $1300, which I feel is a very conservative rent as there are units in the same complex renting for $1400.

Any advice is greatly appreciated.

Thanks

Toly

[Dion DePaoli]

The 50% "rule" is a rule of estimating. For you to analyse the deal pull the actual numbers and add them up. Be logical about what you will have to cover with deffered maintance, etc.

I agree with Nathan, the return looks good provided all the numbers work out as you state.

Typically HOA master policy covers the drywall and out, you will still want to carry a policy for the drywall and in. Depending on what is covered by the master policy and what is not.

As a landlord you will be responsible for the appliances inside the house, what about HVAC and other such concepts? This is where you are trying to justify your deal, which I think is logical as well. In PUDs and Condos the numbers can work depending on what is covered by the property versus you and what sort of net income you can pull.

I also agree that loan program looks pretty darn good. Ensure you are not priced as a primary residence, that rate looks low. A seller will not be able to cover 100% of you closing costs usually around 3.0%. The debt service number you stated doesn't add up but let's assume what you posted is correct. (P&I = 386.00 / I/O =279.50)

All in cost per month = 820.00
Rent (Low) = 1,300
Margin = 480 (36%)
If you allocate 120 per month to deferred maintenance you still net 380
ROR = 22%
Year reserve = 1440 - will that cover your future property obligations?

Not a bad deal at all if all of the numbers you provided are correct. Again, check the loan program, make sure they have you as a Non Owner Occupied property and the rate is correct.