Is this a good deal? - Posted by Paul


#1

Posted by Eric (NH) on December 23, 1998 at 22:43:51:

Paul,

These numbers are quite similar to a condo deal that I recently had–and I was quite happy with my return after selling eighteen months after purchasing. However, my numbers included allowances for maintenence and special assessments–both of which were sizeable. Your deal seems O.K., assuming that you have accounted for a vacancy factor (5-8%) as well as projected maintenence costs.

Eric (NH)


#2

Is this a good deal? - Posted by Paul

Posted by Paul on December 23, 1998 at 15:27:31:

Buying a 2-unit with rented garage. Asking price was $49,900, we ended up with a contract at $43,500 with the seller paying up to $1,500 in closing costs. I’m putting 5% cash down ($2,175) and paying my remaining closing costs (est. $1,600) with an unsecured line of credit. Conventional 80% 1st mortgage at 7.375% for 30 yrs. Seller is providing 15% second at 9% for 15 yrs with 5 yr balloon and quarterly pmts.

EGI is $9,348 and NOI (no mgt fee) is $5,342. Net cash flow after debt service and taxes will be $1,000/yr. This includes pmts. on the line of credit, too.

Seller is carpeting and painting part of one unit, and agreed to fix items of minor deferred maintenance. Bldg. inspection also revealed more serious problems with the electric and one of the furnaces. Seller must now either agree to have these repairs/upgrades made or the contract is void. If he agrees, to make repairs, the work must be completed by appropriate licensed contractors.

Would appreciate an experienced investor’s opinion of this deal…Paul


#3

Re: Is this a good deal? - Posted by Cesar

Posted by Cesar on December 23, 1998 at 21:59:26:

The only way to put this into perspective is this:

You say your return will be $1,000 per year.
That’s $83 per month.
You will be putting up $2,175 of your own money.

So far so good. Now:

What happens if an appliance breaks?
What happens if the roof leaks?
What happens if one of your tenants damages something?
What happens if the A/C goes? Or the Heat?
What happens if you have a vacancy?
What happens if…

I think you get the point. Not to say that it’s a BAD deal, but it’s not exactly a GOOD deal either. You say it will be worth $50,000 when it’s fixed up - So what is it worth now? Would you say about $43,500 maybe? So basically you are paying the fair market value (or retail) for the property. I believe that’s what Redline was trying to say about your profit going in> there really isn’t any…

Any one of those items I mentioned above could wipe out ALL the “profit” you would be making on that property, and it could turn into a nightmare.

Just some food for thought. Make sure you use realistic, worst-case numbers when you go into a deal, because as Murphy said - If anything can go wrong, it will. Believe me- my Christmas money is all tied up on a deal that SHOULD have closed over a month ago, but little “situations” keep coming up…

Happy Holidays.


#4

Re: Is this a good deal? - Posted by Redline

Posted by Redline on December 23, 1998 at 15:35:30:

Where’s the deal? If you meant this property for an investment $6,400 off the asking price here doesn’t seem like anything, except if you’re going to tell me the place is worth $100,000. So, what is the place worth? What do you plan to do with this property? Where is your profit going in?

RL


#5

Thanks for the warnings. - Posted by Paul

Posted by Paul on December 24, 1998 at 07:44:19:

The tenants provide their own appliances and air-conditioning units. If the tenants damage something, that’s what security deposits are for. As far as other repairs, I realize they will come. This is why we are requiring the seller to repair and upgrade everything we can. He owns the property free and clear and will have more cash to do it than us. If he doesn’t agree to the repairs, we walk. There are plenty of other properties and motivated sellers out there.

My numbers include 5% vacancy in calculating the EGI and $500/yr for repairs in my expenses. Other expenses were based on my review of 2 years of the sellers schedule E’s plus quotes I got myself for insurance, etc. The cash flow projections are averages, I realize they will be higher or lower over time. How can I estimate any better? I appreciate your warning, and am trying to be as realistic as possible.

Do you always require a substantial “profit” walking into a property? As-is value is $47,000.

Paul


#6

Let me re-phrase the question - Posted by Paul

Posted by Paul on December 23, 1998 at 18:34:01:

How about - is this a good investment? The property will be worth $50,000 after the seller upgrades the electric and replaces one of the furnaces. I realize I’m not walking into a lot of equity, but am not looking to flip it for a fast profit. I intend on holding the property for at least five years. My question is this - is a 46% return on equity and probably a 30%-35% yield over the holding period a reasonable return, considering I’ll be managing the property as well?


#7

Yes - Posted by Redline

Posted by Redline on December 24, 1998 at 16:30:04:

The general philosophy here is “make your money going in” and that means buying at substantial discount.

I personally don’t believe in a buy-and-hold mentality (paying close to retail in the process) right now with investment property because I feel there are too many unknowns. What if something breaks (as Cesar mentioned), what if the taxes go up (very likely around here), what if you get a deadbeat tenant that it takes a month or two to get out? The only way I would purchase and rent something out is if I got it for such a deal that the place is kicking me a few hundred dollars a month AFTER covering all my nightmore scenarios.

Finding investment property out there at close to retail is relatively easy to do and is no deal to me. Why rely on appreciation that may not happen? Why not find something where you’re making your money as soon as you purchase?

Also, $500/year for repairs? I find this to be WAY too low. That $500 could be gone in an hour if you have a problem with the furnace, or even a water heater! (correct me if I’m wrong because I didn’t see any other expenses besides debt service).

I would reconsider this and realize that at retail or close to it, 2 family houses (at least in my experience) are extremely hard if not impossible to make a profit on. I don’t see your profit forecasts becoming reality but then again, what do I know! :wink:

Good luck and keep us posted,
RL


#8

Correction - Posted by Paul

Posted by Paul on December 23, 1998 at 19:46:03:

Correction of est. equity yield of 60%-65% instead of 30%-35%.

$2,175 cash in.
$1,000 annual net cash flow after taxes and debt service.
$53,000 selling price in 5 yrs, less 9% selling costs, less debt payoff = $8,626 net proceeds.