Originally posted by @Anthony Chara:
Hi Neil, there are some valid points being made on both sides for you to buy or walk away from this deal. Here's my 2 cents: First off, last time I checked my calculator a $12,000 return per year on nothing down is an infinite return as a few people pointed out. On the surface, that sounds like a good opportunity. One thing you need to double check though are the true expenses. Sometimes, people don't include a management fee or setting aside reserves for maintenance and repairs down the road.
Does your estimate of $12K a year include you paying someone else to manage the property for you? If not, subtract 10% of the collected rent a year from your $12K figure. Even if you plan on managing the property yourself, you STILL need to subtract that fee just in case you change your mind in the future and decide you no longer want to manage it yourself.
Second, if you don't have a reserve acct built in to replace things over the years as they wear out like paint, carpet, flooring, roof, water heater, ac, etc., then subtract another 10% of the annual collected rent from your $12K of projected cash flow.
If you have already subtracted those amounts, then this could be a good deal. You'd be pocketing about $300 per unit per month. However, if you didn't take the two items above into consideration, then after you do the math, you'll probably walk. Just because you can get 100% Seller Financing, doesn't mean you should take it if the $12K you think you'll make isn't $12K after paying for a PM and setting aside reserves.
Hello Anthony,
Great points from both ends indeed. My calculations were after the operating costs and mortgage payments; insurance and tax payments as well. I did not deduct the 10% management costs or vacancy rate. Its a 3 family with two 4 bedroom apartments and one 3 bedroom apartment, $1250/$1250/$1150. One to two blocks away from the nearest hospital, buses and schools. The three family is completely renovated with central air and new roof. The mortgage is at 4% interest and the PMI is 0.008% of the loan amount. No money down, I just have to show reserve capital for 3 months of the mortgage payment amount. The seller said he will assist me in getting section 8 tenants if I agree to move forward with this deal. He's an investor / mortgage broker and I am sure he will make well over $60k profit if I decide to purchase.
I know as an investor, the ideal goal is purchase 60 cents on the dollar, I was just wondering if that is always the case even if a property is capable is creating passive income at retail. I know I would be shooting myself in the foot if anything goes wrong being that I have no equity. I also see @Anthony Dooley's point about how ROI isn't worth that magnitude of debt, its just a very interesting scenario being that there is no initial capital involved on my end for an estimate $1000+ passive income a month. I'm leaning towards not following through with the deal, but I'm not experience enough to know if I'm walking away from a freebie or a headache.
