Posted by Will on August 31, 2005 at 11:43:31:
n/m
Buying property analysis…please reply!!! - Posted by J. David
Posted by J. David on August 30, 2005 at 20:26:28:
OK-I am a newbie REI and I have done my due diligence. I have read and studied for almost a year, everything from DOW to Sheets to LeGrand, etc…not to mention this site and several others. I have read and read and read some more. I have about $25k to work with. I want to build that $25k into $50k, then $100k, etc… I know this won’t happen overnight and I am ready to work to do it.
My question is this. I found a house that has been sectioned off into a duplex that I can buy for $80k. The total rent is $1k monthly. I have no idea what the FMV on the house is, but I know it will cash flow about $300 per month. So, if the comps show the house only to be worth $80k, but it cash flows $300 a month… shouldn’t I still buy it? I know you make money when you BUY the property, but I would keep this as a rental, and look for a few more like it.
Please give me your opinion/experiences in this, as I am interested in getting a lot of viewpoints. TIA.
Re: Buying property analysis…please reply!!! - Posted by Reggie
Posted by Reggie on August 31, 2005 at 09:25:31:
Also, make sure it is properly zoned to be a duplex since it was a conversion, and make sure all permits for the conversion work are in line and may want to have someone inspect the work. It is a good possibility the utilities are not split so see who is paying those.
Reg
Re: Buying property analysis…please reply!!! - Posted by Lyal
Posted by Lyal on August 31, 2005 at 06:57:38:
JD,
JT is right on the money (as usual).
One question, how did you arrive at the $300 monthly cashflow? Does that include a reserve for deferred maintenance, vacancy allowance etc? How about debt service?
In general, from my limited experience as a landlord, you need to subtract 40% right off the top of the rents to cover expenses etc. This is just for preliminary numbers. Then, if you can still pay the loan and have a nice cash flow, you need to dig into the real numbers (with PROOF from the seller), figure out how much you’ll need to put in to take care of deferred maintenance and see if it works as an investment.
Lyal
Depends… - Posted by JT-IN
Posted by JT-IN on August 30, 2005 at 21:37:41:
JD:
The answer depends on a couple of things… How is the overall market in your area…? Appreciating, steady, or ??? How many props have you looked at prior to this one…?
You really need to determine what it is worth, prior tp purchasing. So you need to do some more DD on this purchase. You mention that it would have $ 300 pos c/f, assuming after a mtg, but you don’t mention what amount of LTV, or in other words, how much of yoru 25K will you be parting with up front, to produce the 300 per month c/f; (asuming that it is truly 300 per month, and I’m not yet ready to concede that point).
Are you rock solid sure about the expenses on this property…? Who is paying what amount of utilities, or are you relying on someone elses representation to you of expense…? You wouldn’t think that a seller might omit or alter some of the actual numbers, to enhance your view of the property, would you…? Why of course they would, if they thought that they could get away with it…
All I am trying to get you to do is to BE SURE of your assumptions here. Once you sing on the dotted line, it is a little late to come back and say… You didn’t tell me about that $ 125 per month expense… I am not personally opposed to such a purchase, assuming you are not paying any more than market, of course I would hammer, hammer and hammer on them some more, to reduce your entrance fee, (price)… Maybe get the seller to pay your closing costs, etc, at the very least… Just don’t be in a position that you are afraid to negotiate on the property, for fear of losing the deal… That represents an emotional buyer…
So get some more info, know the true mkt value of the property, and negotiate your best deal… assuming you aren’t having to put down 20%, plus pay closing costs out of pocket, to arrive at the $ 300 per month c/f… You do see the difference, I hope.
There is an opportunity cost of parting with funds in your pocket, so if you are going to do so, make sure that the cost of that opportunity is funded, and funded well.
Jut the way that I view things…
JT-IN
Re: Depends… - Posted by J. David
Posted by J. David on August 31, 2005 at 17:31:03:
Thanks for all of the replies, you guys are very helpful. The property has 2 seperate meters. I would pay the water bill, tenents pay everything else. Here’s a brief cash flow analysis:
gross rent- $10,800 (with room for increases)
vacancy rate-5%
taxes-$600
insurance-$400
utilities-$100
water-$600
This gives me a NOI of $8,500, x cap rate of 10, $85k, which is the asking price. I am putting 5% down, financing the rest on a 80/15/5. The cash flow will be around $300/monthly.
The guy selling is an investor that is liquidating. I think he used the above analysis to arrive at his asking price. It has new HVAC, kitchen floor, and carpet on both sides.
What I was asking is what do you think about buying a property when you don’t get it for less than 80% FMV- as long as it cash flows would you do it? The guy is sticking on his $85k firm…trust me, I have hammered and will hammer some more on price with him. I certainly am not a motivated buyer and will walk away in a heartbeat if need be. Like I mentioned before, I know you make your money when you buy the property, I was just curious if others bought over the 75-80% of FMV provided it has a healthy cash flow. TIA.