Possible Deal - Whatcha think? - Posted by Seth

import · September 20, 2003, 7:30pm

Posted by Ronald * Starr(in No CA) on September 21, 2003 at 12:18:30:

Seth-----------------

I’m not able to tell you what sort of loan you could expect if it is stictly a rental property. I am guessing that you are looking at a minimum of 10% down and an interest rate abouit 1 1/4 % higher than for an owner-occupied loan. In general, owner-occupied loans are quite a bit better than non-owner-occupied ones.

It is possible that your expenses will be lower. About the lowest you can expect is probably 25% of the rents. So you culd work with 30% as your estimate, if you want to be a little optimistic. I forgot to put in a couple of other potential expenses: credit check fees is one, the other one I’ve already forgotten again.

Good InvestingRon Starr*****

import · September 20, 2003, 7:30pm

Possible Deal - Whatcha think? - Posted by Seth

Posted by Seth on September 20, 2003 at 19:30:34:

Hi all,
Here are the facts:

3 family in decent condition.
1st Fl - 3br rents for $1000
2nd Fl - 3br rents for $1000
3rd Fl - 1br rents for $750

Asking price of the house is $190,000.
Taxes are: $2,700

Even though this is my first deal, I would buy and hold this property. I’ve done some Comparable Market Analysis, and I can’t find anything that’s close to this price (So, I don’t know if i’m overpaying for the home). I do know after doing research, the owner bought the house in March of 02’ for $120,000. Either way If I took a mortgage out for 180K (put 10K down), It looks like I could have a positive cash flow of about $1,600ish/mnth.

Does this sound like a good deal (and do the calculations sounds correct)??

Thanks all,
Seth

import · September 20, 2003, 9:38pm

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:

Seth----------------------

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***

import · September 20, 2003, 9:27pm

Re: Possible Deal - Whatcha think? - Posted by Jeremy

Posted by Jeremy on September 20, 2003 at 21:27:07:

Sounds like you got some phantom equity going on there. It looks like it would cashflow nicely with those numbers, but he is sticking it to you on the equity if he paid 120,000 a little over a year ago.

import · September 20, 2003, 11:24pm

Re: Possible Deal - Whatcha think? - Posted by Seth

Posted by Seth on September 20, 2003 at 23:24:12:

Ron,

Thank you for your well thought out response. I always look forward to reading your postings on this newsgroup. I will see if I can tie this property up with a purchase contract.

I will be managing the property myself, but I don’t see where the monthly expenses of 35% the gross rents comes from. Is that just an industry standard? Can you please explain what’s included in this 35%.

As for the offering price. It is 190K, but I won’t be offering that. I will offer 160K, then negotiate. I was just using 180K as a very conservative number. I figured if I took out a 180K loan out for 30 years at a 6% interest rate, my montly pmts would be $1,080. With a rent roll of 2750, I figured there would be about $1600/mnth profit. This is without adjusting for 10% vacancy factor and other expenses. I am a first time home buyer, so I believe I can get a 3-5% down mortgage from FHA. I do have a good job, and my credit is 726 (Is that good???), BUT… I don’t have a lot of money since I am 23 yrs old and just started working a year ago. So there won’t be that much room for error or if something goes wrong with the deal. (Although, if I was in trouble, I have access to family with $$ )

Also, what exactly does the schedule E on the 1040 tell you? And do you know where I can find a good sample purchase contract with these contingencies in them? Thank you so much for your advice Ron and everyone else!! I look forward to hearing from you again.

-Seth

import · September 21, 2003, 3:04am

Re: Possible Deal - Whatcha think? - Posted by Gib

Posted by Gib on September 21, 2003 at 03:04:25:

While I would offer less than the asking price, that doesn’t mean the seller is “sticking it to” anyone. It is quite possible he did extensive work to the property, or he simply bought it right. His purchase price has no bearing on the properties worth.

Gib

import · September 21, 2003, 7:38am

Re: Possible Deal - Whatcha think? - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on September 21, 2003 at 07:38:35:

Seth--------------

Thanks for explaining your numbers.

First, I used 7% as an interest rate on a loan, as I assumed that this would be strictly an investment property. You used 6% which is probably more accurate, as you now say you will be occupying the property, something you did not mention earlier.

You say: “… I figured there would be about $1600/mnth profit.” That is a common mistake that beginners make, just subtracting the mortgage payment from the scheduled gross rents. There is nothing like that in the way of profit to be expected. It ignores the possible loss due to vacancy and uncollected rent when non-paying renters are occupying the units. It isnores all of the many expenses.

And just 35% is sort of like an industry standard. That is a rough estimate of the costs of owning a property when you manage it yourself. It includes the following:

Insurance
Property Taxes
Utilities
Repairs
Office and other expenses, such as phone, etc for managing the office.
Advertising for new renters
Possible city taxes or business fees
A reserve fund to be built up over time to pay for major expenses, such as new roof, paint job, replace water heater, replace air conditioner or furnace, replace driveway asphalt, etc.
The cost of operating a vechicle to get to and from the property or, in your case, to the vendors where you buy supplies and materials.
Costs of evictions
Costs of attorneys for legal advice and legal services
Possible costs of accounting services or advices.
Any other expenses that I have forgotten to include.

The Schedule E shows the income and expenses for a rental property. However, ast his property seems to have been bought fairly rececntly, it may not be as valuable as it often is for long-term property owners.

Your credit rating is excellent. You probably will easily qualify for an owner-occupant loan.

Good Investing***********Ron Starr****************

import · September 21, 2003, 8:50am

Re: Possible Deal - Whatcha think? - Posted by Seth

Posted by Seth on September 21, 2003 at 08:50:10:

Thanks for your info. I will get the property appraised and see what it’s really worth.

-Seth

import · September 21, 2003, 8:26am

Re: Possible Deal - Whatcha think? - Posted by Seth

Posted by Seth on September 21, 2003 at 08:26:33:

Ron,
Thanks again for you insightful reply. I am not 100% sure if I will be living in the property or not. Still thinking about it. If I didn’t live there, would I still qualify for the 3% down and 6% interest rate? I take it from your posting the answer would be no. If so, what would the major differences be with the amt. put down, interest rate, and tax issues if I did not live there vs. if I did.

Thank for for explaining what the 35% included. It makes sense (even though it’s a bit steep).

I will re-calculate my numbers and see if it’s a good deal. Thanks again.

-Seth