A Deal Or Not A Deal - That's My Question

Comments(7)

• 
  jeff1200222nd June, 2004

  I have a couple of things for you to consider which may rub some of the shine off this deal for you.
  #1, I think that a zero down loan is probably unlikely for this type of deal. most lenders like to see at least 10% or more donw on NOO loans, and 7% is extremely optimistic as well.
  #2 After you factor in a vacancy rate of 80%, and a maintenance budget of $50 to $100 per unit per month. you are looking at very little monthly profits left for you. and that's if you are the property manager. Do you want to work for free?
  I'm no expert in multi-family properties, and that's something I'll learn later, but this one probably would not be my first choice to learn the ropes.
  Jeff

• 
  alex66823rd June, 2004

  Thanks very much for the replies. Couple of questions though. Where do you get the 80% vacancy rate? Would it make a difference if I bought all cash? Or if the property was already had 50% occupancy?
  
  This is kind of discouraging because it seems like such a great deal (nearly 50% of ARV).
  
  Thanks

• 
  dealfinder23rd June, 2004

  Alex,
  
  Excuse my ignorance but is this fourplex in Southern California?
  
  Dave
  [addsig]

• 
  alex66823rd June, 2004

  No, it's in a solid neighborhood in San Antonio, TX.

• 
  active_re_investor23rd June, 2004

  ARV of 50% is a good deal. Not sure that the cash flow will be great but you do not have to hold after repairs and getting the place rented up.
  
  If you can buy for cash you will definitely get the cash flow to work. It would not be the most efficient use of your cash long term. In the short run it could be just fine if the cash is just sitting around otherwise.
  
  A quick calculation to test the cash flow assumptions...
  
  Take the ARV of 160K and assume you could get a loan for that amount (not likely). Then using 7.5% you would have payments of slightly more then $1,100 a month. Assuming the lender will want no more then 75% of the rent to cover the mortgage payment (25% for other running costs) the target rent would be $1,450. You are projecting $1,600. Seems like you would have good cash flow using the crude estimates.
  
  Make sure you have your numbers correct and you can deal with the opportunity at a distance. Without doing a professional review of all the details it looks like this could be worth your time.
  
  Plan for multiple different ways to exit so if you do buy you do not get trapped. Then have the guts to follow through on good deals when they happen!
  
  John
  
  PS. Anytime a place is way below ARV there is normally a reason. As the repairs are not that high make sure you know why the seller is running away.
  [addsig]

• 
  commercialking23rd June, 2004

  Well an 80% vacancy assumption is way too high. 20% (which is what I think Jeff ment to say) is still pretty high and probably higher than you need to assume (especially if you've also assumed a 20% discount in rents) I used to figure 5% back in the days when I did this sort of deal ask around find out what vacancy rates are in your area.
  
  The real unknown at this point is operating expenses. You are assuming a $2,000 tax bill--why? Actual taxes are not that hard to find and it removes doubt from your biggest espense. Do the tenants pay the utilities?
  
  That said, this looks like you can buy for about 8 times net. "8 times net is a very good deal"
  
  The devil, as I always say, is in the details. You need to get solid expense numbers and occupancy numbers (rent amounts and vacancies) but once you've got a net before debt calculation you are comfortble with then getting to "value" is easy, ether a 8 NRM or a .12 cap is a good deal. Always
  
  Mark

• 
  sharpREI_PA23rd June, 2004

  active_re_investor
  You said this would not be a good use of cash in the long term...but maybe in the short term. What would be a good use of cash in the long run?
  
  Just curious
  
  thanks..
  
  Chris G