All Forum Posts by: Greg Callan

As food for thought or maybe just good conversation. I created this spreadsheet. It compares living in one of the four units of this investment property, to paying rent at my current apartment, and purchasing a home in the area. As you can see, it would save me money compared to the other options, but it would be on a thin margin and potentially negative cashflow if I decided to move out. I used my best guess estimates for expenses here which come out to 42% of rental income. This is after tax. (EDIT - please ignore some of the colors, they do not mean what they may appear. Red text is not necessarily negative). 

@Angelo Wong I am leaning heavily toward that opinion at this point. I just wanted other opinions and to get feedback as I explored this first potential buy. I may speak further with the seller and see if we can find a deal that works for both of us. Unfortunately, I am not optimistic. Selling the property at a major loss is not an option I want to consider at this point in time. I am financially stable and do not want to rock that boat too much by taking reckless risks.

Thanks for the feedback @Thomas S. I believe that if the property will remain an option for me, the price will have to reduce. Rent will not probably be able to increase because I think we are nearing the top end here. Again, I have a larger (3 bedroom apartment) in a nicer part of town, with more amenities (e.g., fitness center, pool, hot tub) for $1050. I doubt many people would pay more than $850 for the property I am looking at.

While I am looking at estimating expenses. I could use some feedback if the 50% rule fits me well. For example,

I am in Utah where the property tax rate is low (.76%). Two of the units will be completely renovated and the other two were renovated two years ago. Roof and furnaces are relatively new. I'll have to dig to get specifics, if I decide this property still has a chance. Utilities are paid for by the tenants. I would be contracting a management company (10%) and paying someone to take care of outdoor duties ($100 per month). I have yet to get an insurance quote because that seems impossible until the renovations are complete. When I used the 1% rule for maintenance ($4500 per year) plus the above expenditures), I came out with a NOI of $22,200 after expenses. So NOT drastically different from the 20400 with the 50% rule. Also, could someone help clarify for me. The 1% rule does or does not include the Cap Ex improvements? 

@Chris Grenzig - Thanks for your advice. I will look into the things you have suggested here. 

@Chris Grenzig Thanks for your reply. That was my understanding as well. Thank you for refocusing me on Cap rate given that it does not account for the financing which is on me. I've read that what is considered an appealing cap rate may change from one location to another and that in some places (e.g., large metropolitan areas) lower cap rates may be considered appropriate. 

How do I research what a reasonable cap rate is in my area? Given that this would be one way to estimate a fair offer (e.g., "at 5% cap rate, the property value is $408,000").

Hi Russell. Could you tell me a bit more? Making sure that I make an educated decision (whether that is to hold em or fold em) is the reason I am here. Initially, my estimations of this property seemed like an opportunity that couldn't be missed, but as I have researched them further, the benefit has slowly dwindled. Could you explain a bit of some of the factors that would change this from a loss to the home run? or why $3400 on a 450K property would be a home run? Have I missed some variables that are important? I'm not sure I am familiar with the concept of A/B class so I am a bit ignorant there. Thanks in advance

Thanks Bjorn. I agree with your sentiment that the property isn't doing well for me at $450k, but when I use a calculator to examine what the price would need to be to make it cashflow, it doesn't seem fair to ask that price of the seller. Moreover, I wouldn't get that price, other less lucrative properties are selling within two days in the market here. It is possible, however, those buyers have a different end-game / strategy / downpayment / etc... than myself.

Jay. Thanks for your feedback. I tend to agree that they should bring in some net. There is also an assumption that the cashflow should grow over time as the rent inflation and expense inflation diverge, but housing values are high right now so I don't know that is a good bet to hedge right now. 

Hi Russell, Thanks for your feedback. Yes, the property is a 4plex. I would plan to live in one of the units as a means of saving money. The math gets pretty complicated to explain in paragraph form when I start talking about saved rent or saved vs a mortgage on another home, so I went simple here to assess if the base unit is a good plan if I should decide to move out before the 30 years are up. 

There are some factors that do not get addressed here then. For example, the tax savings on a four plex that is only renting 3 units would be higher than average because it would look like I am taking large losses from the unit, when the losses are offset by savings from rent in another location. 

Thanks for your feedback that most are expecting a 20% downpayment when evaluating the property. Could I get multiple opinions on that?? If so, the payment would be about 1877 a month for principal and interest which still puts me at a negative cashflow of $177 each month before tax advantages like depreciation. 

Hello all,

I am very new to investment real estate. I am evaluating some of my first potential buys, but I could use some guidance to determine when a property is not a good deal because of the parameters of the property or when it is not a good deal because I am expecting to have my cake and eat it too. 

Here are some details. The property sale price is $450,000. I was originally told that each unit was renting at $750. While researching it, the rent for the units have increased to $850. I currently have an apartment that is much nicer in a better part of town for $1050, so I feel like $850 is probably stretching this property. Two of the four units are being completely renovated due to a water heater blow out. The concept pictures of the renovated apartments do look VERY nice. In fact, nicer inside than my $1050 a month apartment, but still quite a bit smaller and in a part of town that is not as nice. Thus, my assumption is that $850 a month might be pushing it and it is possible I may see the rental price roll back to $750 especially if there is a downturn in the housing economy. Regardless, I will go with the optimistic $850 for the initial discussion.

Thus, total incoming rent = $3400 ($850*4)

Net operating income per month =$ 3400 / 2 = $1700 (Using the 50% rule here. My own estimations of the expenses came out to 42%. Please let me know your opinion of the 50% rule. The management company indicated that 35% was a good rule of thumb for expenses but that seems way too low after reading many posts about the 50% rule.

Financing - a 10% downpayment on an FHA loan, with 4.75% interest, and $268 of PMI each month for 132 payments. The monthly principal and interest payment is $2149.00.

$1700 NOI/month - $2149mortgage = -$449 (negative cashflow after I pay my mortgage)

-$449 - 268PMI = -$717 (negative cashflow with PMI)

From this perspective, the real-estate doesn't look like a good investment, although property depreciation and tax losses would offset some of these losses in the first few years. So where do I go from here? Is the seller's price unreasonable or am I unreasonable to expect a property to cashflow with a 10% downpayment?