Posted by Bill K. (AZ) on April 30, 1999 at 24:20:31:
Jim,
Please enlighten us on your method of analysis. How do you determine that this property is only worth $128,000? It looks to me like it breaks even if Dairn buys for $120,000. And, if his comps are correct, he could be sitting on a property worth over $170,000.
What am I missing here?
Bill K. (AZ)
Duplex - Would you do it - Yes or No - Posted by dairn
Posted by dairn on April 29, 1999 at 14:35:45:
$120,000 Sale Price
Rents $520.00 and $700.00 Total ( $1,222.00 )Month
Currently Has long term tennants
One 2 Bedroom
One 3 Bedroom
2200sf of living space
Seperate entrances
Nice yard
Mechanically sound
New Roof and siding
Lower unit updated
Top unit needs some cosmetic
Taxes are $100 Month
Insurance $50 Month
Loan for $120,000 @6 % = 720.00 p/m payment
Over all condition of property on a scale of 1 - 10 = ( 7 )
Appreation in area is around 4-5% p/y
Located in a very very nice and desirable area
Average comps are at about $80.00 -$95.00 per square foot
Total expenses p/m = 870.00
Total income p/m = 1,220.00
Net p/m = 350.00
-0- Out of pocket to close
If you are experienced in rentals, would you take this propery on YES or NO based on the above information
Garbage In…Garbage Out - Posted by JPiper
Posted by JPiper on April 30, 1999 at 10:22:32:
What’s the old saying “garbage in, garbage out”?
Let’s take a look at your numbers here. You say the property is worth (based on comps) $80 per square foot. For some reason your seller is willing to sell this duplex $50K under market, with exceptional terms on the financing. Nice guy. Gross rent is $1220 per month. One thing we know is that expenses (including taxes and insurance, maintenance, vacancy, deferred maintenance, etc) over time will approximate 40%. So when I apply this 40% factor to your gross rent, I end up with NOI (net operating income) of $8,784 per year. Dividing this by the supposed value of this property based on square footage comps of $80 (this is $176,000) I get 4.99%. That’s what we call a capitalization rate.
Here’s what that means. If I paid $176,000 for this property, based on this income stream and reflecting expenses that I would pay, I will earn 4.99% on my money. Right now, I have some money in a money market fund earning about 4.5%. So here’s my question: who do you know who would pay their money to buy a property, take the time and effort to operate it, in order to make a return that they could make in the bank?? I doubt you would find anyone other than a fool, because it’s not rational. What this leads me to is that in a rational world NO ONE would do this, and therefore this property is not worth $176,000. Your comps are “garbage in”. Further information seems to confirm this: the owner is trying to sell it at $120K with exception financing. Wonder why? We have a nice property, with long term tenants, in a good area, $50K under market?.I can almost feel the hook going in!
Now let’s work the same numbers using $120K as the purchase price. When I do this I get a cap rate of 7.32% (NOI divided by $120K). Is the property worth this? It wouldn’t be to me. I don’t know the values in your area?.but 7.32% is certain not an exceptional return. To me this looks more like a deal you could find anywhere.
If I take a 10% cap rate, and apply it to these numbers I get a value of about $87K. And I can tell you that in my market a 10 cap is more apt to be a market value?.rather than a deal.
So based on what you have presented this deal is NOT a deal. The one factor that MIGHT change things is IF the rents are low. That’s information you didn’t provide. But you said you wanted to know a “yes or no” based on what you provided. Based on that my answer would be NO.
Somewhere in the information you have provided is “garbage”. One area in all probability is the “comps” that you provided. The other area may be that the rents are under market. I’d recheck your numbers?.but I wouldn’t do this deal based on what you presented.
JPiper
Re: Duplex - Would you do it - Yes or No - Posted by Jim_MA
Posted by Jim_MA on April 29, 1999 at 21:52:17:
Looking at this deal purely from its income value its only worth 128K using your expenses. I would pass on this one
The only way - Posted by Bud Branstetter
Posted by Bud Branstetter on April 29, 1999 at 17:16:12:
The way an investor would look at income property is what cash is he going to get for the cash he invests. If you take vacancy(10%), maintenance(10%), management(10%) and the other expenses you are at a break even. The comps per square foot means very little until you find a buyer that is willing to buy that way. If you take the net operating income after all these factors and compare it as a CAP rate to similar properties you will find whether it is above or below. You want it above so that you can sell at the going cap rate. What you also would need to know is where are rents compared to comps. Even on a per sq ft basis. If you are buying with owner financing and have no capital at risk the question changes. Are you looking for a job as manager or maintenance man? If you want the experience then lease option it. You can make more money other ways than with rental income.
Re: Duplex - Would you do it - Yes or No - Posted by David
Posted by David on April 29, 1999 at 15:11:22:
Have you verified that you can get the loan for 6%? Is the seller doing the financing ? 6% is a great rate for non-owner occupied ! I would do it if all of your numbers are correct. A higher rate would knock out your cash flow though, so be careful !
Based on Your Information…DEFINITELY! - Posted by Bill K. (AZ)
Posted by Bill K. (AZ) on April 29, 1999 at 15:00:11:
Dairn,
Except for your expense figure of $150/mo, which doesn’t include repair expenses, this sounds like a GREAT deal. I would figure all expenses at 35%-40% of rents or $488/mo. So, your monthly holding costs will be closer to $720 + $488 = $1,208/mo. This is break even.
However, if your comps are accurate, you stand to pick up a $176,000 property, appreciating at 4%-5% per year, for $120,000. I’d go for it!
I hope this helps.
Bill K. (AZ)
Re: Terms - Posted by darin
Posted by darin on April 30, 1999 at 14:15:42:
$120,000 cash to seller, I have a credit line aginst my deceased mothers trust account that I can only use for realestate investing at 6%. I have flipped several properties on this money and now I am looking for a rental because I now have other capital to play with. The catch is, kind of like a 1031 exchange, I have to buy a property within th next 30 days or I cant use it.