All Forum Posts by: Account Closed

I really appreciate the help from everyone!

I'm looking at a property here in Austin. It's in a low-income neighborhood, which is the biggest concern of mine. I would not assume any good appreciation on the property.

The 4 units are all rented, all month-to-month.

I'm getting a good rate on a conventional loan with 25% down.

I'm assuming these expenses:

10% vacancy

15% maintenance & repairs

$85/mo for lawn maintenance and misc

Property taxes based on 2012 records (plus some for appreciation)

Insurance based on rate quote

PM cost of 8%, with estimate of 2 new leases (at cost of 80% of month rent).

These all boil down to a 55.47% of gross income expenses (more than the 50% rule).

So these numbers are based on above expenses, with and without PM:

Cash on Cash: 5.35% / 9.15%

Total ROI: 9.2% / 13.0 %

Cap Rate: 6.44% / 7.48%

GRM: 7.69 / 7.69

Debt Coverage Ratio: 1.3 / 1.5

Break Even Ratio: 0.80 / 0.73

Since it's about an hr from where I live, and in a bad neighborhood, I was considering using a PM.

There was talk about the rents being raised, but I probably should not consider that at all in my analysis.

Any thoughts / comments / suggestions?

Thanks!

Brandon

Michael Johnson -- I have to apologize for hijacking your thread. I can post this as another thread if you'd like.

Michael Johnson -- Being an hour away was one of my concerns too. And why I was considering a PM. And my wife would not be comfortable in this neighborhood, so it would be me going over there all the time.

If I assume a 10% vacancy rate, 15% maintenance/repairs (too high?), $85/month lawn care and misc, and include the property taxes and insurance.
PM fee I assumed (from two local providers) of 8% of gross rent and the cost of two re-leasing (80% of one month rent) per year.
All expenses and vacancies comes out to ~55.5% of gross income.

With current rents:
cap rate: with PM: 6.44% wo/PM: 7.48%

If rents of three units increased 8% to the rent of the other unit:
cap rate: with PM: 7% wo/PM: 8.1%

A 4-unit is still residential, at least here in Texas.
Where the property is, I'm not counting on as much appreciation as in other locations.

I would hope I could get some deposit from the one tenant that has no deposit on file. But maybe that's being too optimistic.

This seems like a good deal - if I can stomach the "risk" I'm assuming.

Thanks for the help!

Michael Johnson -- Actually, I appreciate the book answer! I'm new at this and really need any good advice I can get. Thank you for the detailed response!

I'm currently looking at a 4-unit property that is in a low-income neighborhood. This would be my first REI property. The property looks like it will cash flow great, but I'm concerned about the headaches of being a landlord in this neighborhood. I'm a little gun shy hearing about some of the issues people have with bad tenants - not that I'm saying low-income people are bad tenants. I'm just a green newbie.

The property is about an hour from my home, and I was thinking of starting with a property manager. All of the 4 units are rented, but all month-to-month. Three of the units have deposits that are about 1/2 monthly rent. One unit has no deposit.

The property right next door, which looks to be the exact same building, is under contract and has all of the units rented with 1 year leases.

So if I bought this property, I would want to:
1) Raise the rents to the current market rates (about an 8% increase, which one of the units is already paying).
2) Try to get one-month's deposit instead of $0 or 1/2 months

I have not spoken to the tenants yet or even seen the inside of the property to see what the current condition is.

I'd even be willing to put some money into the units to clean them up if that would keep a good tenant, allow the rent increase and new/higher deposits.

I guess I have a lot of things to think about and learn...

@Michael Johnson -- I don't want to hijack the thread, but I was wondering how you deal with low income / month-to-month renters. Some of the issues I would think you would have are:
1) frequent turnover - month-to-month would allow for this. And so your vacancy rate would be higher, causing less cash flow. Not to mention the cost of getting a new tenant (especially if you have a property management company that charges 80% of one months rent to refill).
2) high maintenance costs - if the tenants assume that they will not get their deposit back, they would be more likely to trash the units, causing more maintenance costs (repainting, fixing damage, etc).
3) lost rent - if the tenants know they will not get their deposit back (perhaps they trashed the place) they might stay in the unit for a month before they move, while you send them reminders that they didn't pay their rent.

I assume that you would have to factor in all of these extra expenses when you consider if the property is actually producing good cash flow.

Thanks,
Brandon