Is this good for a buy and hold?

Question

Hi,

I've been marketing a lot this past week. I got a call from an investor that has a property that he bought at a trustee sale. He likes to turn these over quickly. Here's the deets:

2&2 built in 1946 In San Bernardino; 
1594 sf good rental with improvements
New Buyers price $132k 
Comps $135; 2 with less sf within half mi
piti  $650
fmr  $1200
$100 per sf
tenant wants to stay but can't afford more than $1k per mo. The current agreement is he will vacate when the sellers pay him some moving $$.

This isn't my niche but it came to me so I thought I'd see what you all think.

I have a pure option on it and the option price is written into the sale price.

Please advise; I'm new at this. Thank you

Melodee Lucido · Answer

Thanks guys. I guess we're done here then. I appreciate your help

Michael Lauther · Answer

Melodee Lucido Look carefully at  Brian Hoyt s post. If you are paying anything like 132k for this property you should be getting 1320 to 2640 in gross rental income for this to make sense as a good investment. Properties in excellent neighborhoods tend to be purchased at the 1.5% of sales price point and those less pricey properties in less desirable neighborhoods tend to generate 2% of sales price. ( that includes any rehab)

Pay attention to the info posted on the 2% 50% rule. part of which states that expenses exclusive of mortgage payments will run 50% of the gross rental income. Expenses include taxes ,insurance vacancy, maintenance ,and property management to name a few. 
Most investors that will buy this property to hold will use a similar evaluation method. Investors will take less return on rental income if the prospect of a profit on sale is likely.

James H. · Answer

If you are just trying to find out whether a deal is even worth presenting to a potential buy and hold investor, a good rule of thumb would be to just know whether or not the property will yield  monthly rents of at least 1.5 percent of the total acquisition cost including any rehab costs to the buyer. The buyer can work out the details from there and make their decision. But using this metric, you won't look like an idiot in any case.

Melodee Lucido · Answer

Brian,

The piti based on the sellers purchase price is about $650.

I am not arguing with any of you pros; I am persuing this as a learning opportunity. I don't know much about doing rental deals. I just thought this would be a good chance to learn new stuff. If I happen to make a buck then that would be icing on the cake.

So I went and looked at the comps again. I didn't know how to evaluate comps using $$ per sf. Based on that figure $100 in this case the approx price for this property is $139k.

Here's the comp stats all sold within the last 2-4 mo (without investor comps):

This home:
2&2 1,594 sf,  lot is 17,500  $ per sf $100

Comp #1
3&2.75 1318 sf  lot 6,413  $per sf $102 
SOLD for $135----adjusted price per sf$ $163k

Comp #2  (closest comp???)
3&2 1513 sf  lot 19,800  $ per sf $89  
SOLD for $135----adjusted price is $142

Comp #3
3&2 1322 sf   lot 6,710   $ per sf $85
SOLD $135-----adjusted price is $136

Comp #4
3&2 1574sf   lot 6,270  $ per sf $74
SOLD $116k-----adjusted price $117

The guys that brought this to me have an auction bidding company serving realtors and investors. They say that the discount on this property @ $130k is about 15%

I am sorry if I sound stupid. I haven't taken a course in how to eval a rental deal--yet. AND I have NO desire to be a landlord. I will learn all this so I don't have to throw leads away tho : >

Thanks guys

Bill Gulley · Answer

What was missed is her purchase price, it's unknown, the 135ish number is to her buyer....

EDITED:   :) yes, 132ish, still an unknown purchase price, I'd look at an 85K offer and buy at maybe 95K, depends on condition and a maintenance audit for scheduled repairs

Melodee Lucido · Answer

Yes, that is correct Bill.

Update:
The tenant that is now in the property is agreeing to sign a lease for $1050 at the the time of new purchase----if that's what the new buyer wants.

I talked with the seller just now. He said that I need to re-look at the comps because this one is more per $$ sf. I'm going to see if he is just giving me the sales pitch or this is worth more than $135.

Thank you all for your patience and schooling me on this. I am learning as I go. I market and learn as the deals come in. Remember when you  couldn't see the forest for the trees??

James H. · Answer

That is the only thing I can think of as well. But she said new buyer price (assuming that is her) is 132K and comps are 135K. Even at 20% DP, she could not pay any more than 82,500 to get PITI of 650. That is 61 % ARV. While possible, highly unlikely if the place has recent improvements. And even so, only a mediocre return as a rental even at 61% ARV.

Melodee Lucido, can you clarify some of this?

James H. · Answer

I'm sorry, maybe I'm missing someting, but this sounds like a terrible deal. Here is why, and again, maybe I'm missing something:

You are buying at 132K, but comps are 135K? So you are paying retail.

How do you get PITI of 650 if you buy for 132,000??? Are you putting down $50K?

You stated Section 8 rents about 895 and Rentometer says 800. Lets assume 850 because if you want stable tentants in a 2-br, you don't want to charge above market rents just because it has some improvements. So you are getting about 0.6% of the purchase price in rents each month.  2% is considered excellent, 1% is about the minimum unless you are protecting your wealth in a A-class property.

Using the 50 percent rule analysis, you would loose money on this one every month or have to put so big of a down payment that your return on your investment would not be very good.

Lets do the math with zero DP and 4.5% interest.

Purchase price = 132,000
PI = 668
Rent = 850
1/2 Rent = 425
Profit = 425-668 = -243/month

Now lets do the math with a DP that would get PITI down to 650/month (about 65,000)

Purchase Price = 132,000
Taxes = 2500/year, 208/month (just guessing)
Insurance = 1200/year, 100/month (just guessing)
PI = 342/month (650-208-100)
1/2 Rent = 425
Profit = 425-324 = 83/month = 996/year

[b]You would have to make a 64,680 down payment to achieve 650 PITI. So your CoC return would be less than 996/64,680X100 = 1.5%. That's about as good as a CD and then you have the benefits of mortgage paydown and possible appreciation, but I think you could do much better.[b]

Brian Levredge · Answer

There is no way the cash flow is anywhere near $250.  Maybe that will be the case in a good month with no expenses, but you are not accounting for vacancy, maintenance, management, capex, etc.  Research the 50% rule on these forums for more info.  In short you can expect 50% of the gross rent to go towards expenses over time.  What's left over is used for debt service and profit.

Melodee Lucido · Answer

Well Bill,

You are my hero of the day!!! I went to the public housing authority  site here and it is a GREAT tool. It says the rent is $895. I think this particular prop is above mkt rent because of all the improvements. BUT this is a good place to start for an investor buy.

So the cash flow is only about about $250. hmmm pretty big diff there.  I also would think they would give a price below fmv if they are looking for a FASSST sale as they say they are.

I'll be talking to the sellers this morning.

Maybe they're new too lol!!