Posted by Sean on April 21, 1999 at 09:23:37:
First of all, your better bet is to go after property 1 since it has more equity. Property 2 is already rented, so unless you plan to lease-option it for more than the guy is already taking in, or you’re going to make a large deposit it’s not going to begin to better the guy’s financial situation.
Secondly, you need to do a financial analysis on the property. The one where both units rent for $850 you’ve got $1700 monthly income less vacancy (maybe 10% depending on your area) so about $18,360 a year gross. Assume expenses of about 45% that means you’ll have a net operating income of about $10,100. That gives you a capitalization rate of about 5.3 percent. It would be silly to get a bank loan for 7 percent and invest that money at 5.3 percent that’s for sure.
So let’s deal with property 1. You say one unit is rented for $775 a month. Let’s say both could be rented for that amount, basically $16,740 annual income. If we still assume 45% costs we have $9,210 coming in a year to maintain your debt. Assuming you got a hard-money loan for 65% of the value of the property and paid 15% interest your interest payments a year would be $18,135 which is double what you’d be bringing in.
Unless you have maybe $15,000 to put down and good credit I wouldn’t bother going after either. Maybe your vacancy rate or expenses are lower and I’m just not familiar with your area. See if someone else gives you a better idea.