Analyzing My First Deal

[Teah Schoenle]

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*This link comes directly from our calculators, based on information input by the member who posted.

[Brandon Roof]

This certainly isn't as crazy as it looked on the surface, so nice job finding something renting well below market.  You have a number of surrounding townhouses and apartments currently listed for $1,200-$1,600, so your $1,400 falls right at the midpoint.  I usually prefer to run my numbers at the $1,200 you suggested though.  You can always try for $1,400 and if nobody bites you have a safety net where you can cut rent and still hit your numbers.  Also, there was another $100/month in other income.  Not sure what that would be as I doubt you'd have coin laundry in these units, so unless the $100 is a sure thing in your mind, I'd nix it.

It may be tough to get the property down to $240k.  Unless the seller is motivated, another buyer could step in at any point before the price drops to around $260k, which is where your target price becomes more reasonable.

Looking a little more at the finer details, I would increase the property management percentage. Again, I'm not familiar with the area, but you are likely that these expense run between 8%-12%.  Many with charge 10% plus 1/2 of the first month's rent.  I know of others that charge a flat $99/unit, which it close to your 7%, but they'll also take the entire first month's rent.  You can check around to get more concrete figures, but I'd bump it to at least 10%.

I'd also up vacancy a little. Planning for a month of vacancy may be the way to go, which puts it to 8.33% or you can bump it to 9%-10% if you prefer round numbers.

Between repairs and cap ex, you'll want at least a few more percentage points between them.  They currently combine for 12%, many others like to see at least 15%.  I personally like to itemize my expenses, and depending on the size and age of home, this number can balloon to 25% between repairs and cap ex.  Whatever you decide upon, you want to find a number you are comfortable with so when a large, unexpected expense comes along you can shrug it off.

I can't speak to the water and sewer, but you may be able to have the realtor speak with the current owner to get some actual figures, or you might be lucky enough that these are on separate meters.  Being a slightly newer construction that appears to be built specific as a duplex, they probably are and you can ship this expense right back to the tenants.  Insurance is another one I unfortunately can't provide any insight on.

Some other expenses you may need to factor in are landscaping and snow removal, or you can just lump this in with an elevated "repairs" line item.  Either way, just don't forget about it.

I ran the numbers I've outlined above and got what essentially becomes a break-even proposition.  Zero cash flow but a decent overall return if the property maintains its value and you were to sell 30 years from now.  Not an ideal scenario.  However, if you're able to get your target price and get $1,400/month per unit, you'll be in great shape.

The key is that you'll have to remain disciplined as the purchase price is key.  It may be worth $300k and you may be tempted to pick it up at $270k after months of waiting, but you will be doing yourself a great disservice.  If the number never gets there, don't fall in love with it and simply move on.

If you'd like to get the ball rolling, I'd suggesting trying to locate the owner or contacting their realtor to express how much you like their property but can't afford it at the current price.  Provide them contact information and let them know to contact you should the price ever decrease.  If you wanted to be a little more direct, you could also get your realtor to verbally float your $240k to the other side just to gauge their response and proceed accordingly.  If they say they aren't budging from their number, then you can move on now, and if they say they are going to wait and see what else comes in, you might have a shot down the line.  Just make sure they know $240k is your best and final offer so neither sides time will get wasted with back and forth negotiations.