Re: Possible Deal - Whatcha think? - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on September 20, 2003 at 21:38:10:
It does not matter WHETHER it is a good deal or not. The important thing is that you think at this time that it MIGHT be a good deal. That is all it takes to make the next step: tie it up with a purchase contract if you can. If you can?t, don?t spend any more time analyzing it.
Be sure you can withdraw from the purchase with no penalty. Probably with an inspection contingency. Also good is to have a financing contingency, as you say that you are contemplating getting a loan to buy it. You can withdraw from the purchase if you can?t get the necessary loan.
Then do your due diligence. Get real expense figures from the seller, preferably the schedule E for the property on the 1040s for past tax year. Get information on expenses for similar properties from their owners. Get information about other properties being offered for sale and compare their income and prices to this property. Then get comparable sales and see how this stacks up to them.
Now, the rough figures look good. Dividing the gross scheduled monthly rent by the purchase figure, we see 1.45% a month income on the purchase price.
Now, we can look more closely. Let us assume a 10% vacancy factor. Then you gross rents will be about 2750-275 a month or about $2475. If you manage the property yourself, your total monthly expenses should average about 35% of your gross scheduled rents or about $965, subtracting this, we see a net income, before debt payment and taxes of about $1510. If you really do have a $180K loan for 30 years, at 7% interest, the monthly P&I payment would be about 1200, leaving you with an actual cash flow of about $310 a month. Where did you get that $1600 figure you mentioned? Was that before debt payment?
So, the cash flow does not look stellar. However, you are also talking about putting down about 5%, so the cash flow makes sense given that assumption.
Now, do you think it is realistic that you can get a 95% loan? You have excellent credit and a good job? You have money in the bank for emergency expenses if you run into problems early on in the investment?
Also, why are you offering full asking price right off the bat? Why are you not offering something like 8-10% below the asking price? Maybe offering about $170-175K?
If we assume a $180K purchase price and 20% down, we see a monthly cash flow of about $555. For some people that would be acceptable. For some people it would not. I feel that the important point is how it compares with other possible purchases in your area.
Good InvestingRon Starr***