Calling all Sages! How would you do this deal? - Posted by Terrance Hamel

Posted by Bill K. - FL on February 22, 2000 at 08:14:11:

Hi Terrance,
One way to quickly analyze income properties to see if they make any sense price wise is to look at the gross rent multiplier. Most investors I know, including myself, won’t pay more than 6 X gross in most situations. Analyzing this deal you will find the asking price to be 9.38 X gross which is Very high. The sellers are looking for an owner occupant such as yourself to pay a price based on the fact that you are looking for a place to live and are willing to pay a premium price for the privilege. You will find many duplexes, triplexes, and fourplexes fall into this category. Once you go over four units properties will be considered mainly from an investment point of view and priced accordingly. DOn’t assume you will have the same cash flow as the current owner unless you will pay cash for any equity in the property. More financing means a higher debt payment. Also don’t forget to consider all expenses in coming up with a net cash flow per month. What happens if you have one vacancy, have to replace an appliance, carpeting, do repairs? Do an eviction. (Sometimes these people don’t pay the rent)Also ask the listing broker for comps. There has to be some. Ask, How did you come up with that figure? Hope this helps.

Calling all Sages! How would you do this deal? - Posted by Terrance Hamel

Posted by Terrance Hamel on February 22, 2000 at 24:43:05:

We found 2 duplexes for sale next to each other by the same owner through a realtor (selling agent). We would like to draw upon the expertise of the ages.

The selling agent tells us the seller is tired of dealing with rentals and renters. Duplexes were purchased in 95; both were 146k, but one had a 30k down. They are asking 176900 each. List date is 1/00.

Since we have no good comps, we did a cash flow analysis. Rents are currently 785 each, one is vacant. Rental income is 3140 for 4 units, 2355 for 3.

The mortgages for the 2 duplexes combined is 262k. We dont know the specs of the mortgage, but if we estimate it, their payments are around 470. If they can rent out all 4 units, the duplexes and house payments are paid for and they STILL make a profit of roughly 740/mo.

It doesnt seem like they’d be motivated to sell with such a monthly profit, especially considering they put 30k down. Any advice?

Per duplex, we figure our low offer is 125 and high offer is 155. If we were to buy both from them, we estimate:

Low offer (list price less 30%)
N I PV PMT FV PITI rent profit
360 8 250k 1823 0 2264 3140 @ 4 units 876 (219/unit)
2355 @ 3 units 91 (30/unit)

High offer ($100 profit each unit)
N I PV PMT FV PITI rent profit
360 8 310k 2260 0 2701 3140 @ 4 units 439 (110/unit)
2355 @ 3 units -346 (-115/unit)

With 4 renters, the cashflow is good, even with our high offer. However, we would like to owner occupy one of the units, so our cashflow drops to 30 per unit on the low offer, -115 per unit on the high offer.

Is this really a negative cashflow if we are occupying one of the units?

Any advice how to make this deal work?