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RE question
Old 01-17-2018, 04:32 PM   #1
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RE question

Okay here are some details of an investment I'm considering. It fell into my lap today.

$350k to purchase the duplex from coworker. She's divesting herself of all her properties slowly and already sold in 2017 $1.8 in a 4 plexes. She is keeping 2 more duplexs and a couple more homes elsewhere. She's 69 and decided it's time to slowly divest herself 1 per year.

Rents are $1350 and $1500 for each side. She's owned it for 13 years. The roof is 4 years old and I am not sure how old but water heaters and stuff are relatively newer.

Depreciation she's been calculating about $5k/year. It's been cash flow positive for her for years but she bought for $300k at the peak of the last market.

Is this something I could consider? The numbers appear to work well enough for the risk.

She advised me a four plex is what they teach, 2 units for the mortgage and 2 units for buffer. But I am not sure if I have it in me to find a 4 plex. This however could work.

Running the numbers in BP it says 6.68% cap rate on return and 8.59% cash on cash ROI. I like the idea of diversifying our portfolio.

Thoughts?
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Old 01-17-2018, 04:45 PM   #2
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Real estate is local - how do the rents and price compare to other properties in that area? I like rental property, but prefer paying sale prices. Not sure paying $50k more than it's peak price is a great sale.
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Old 01-17-2018, 04:50 PM   #3
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Quote:
Originally Posted by calmloki View Post
Real estate is local - how do the rents and price compare to other properties in that area? I like rental property, but prefer paying sale prices. Not sure paying $50k more than it's peak price is a great sale.


+1
Paying 16% more than peak does not sound great, but I donít know your area. Iím not willing to pay more than 100x the combined monthly rent for my properties, but that is my area. Donít know about yours.
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Old 01-17-2018, 04:54 PM   #4
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Gut check says no!

Every market is local. One rule of thumb number I've used is purchase price is =100 times a months rent or less.

Taxes and insurance can have a dramatic impact.
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Old 01-17-2018, 05:00 PM   #5
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Cash on Cash should be higher 10% plus.

The way I calculate that is:
PP+ repairs/rent-tax-insurance
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Old 01-17-2018, 05:06 PM   #6
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Unlike stocks or bonds, RE is hands on. It is a business. Do you currently own rental RE? If you have not owned rental real estate, I suggest you read a few good books and determine if it is for you. We have owned several properties and enjoyed the experience. And, like you, I wanted it for diversification. We are about to sell our last rental. Why sell? Well, because we are retired and RE is a business. I don't want to get kicked out of the forum for w*rking.
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Old 01-17-2018, 05:10 PM   #7
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It depends on how close you are to RE. I wouldnít consider it if you plan on retiring within 5-10 years. I wouldnít want to be a landlord in retirement.
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Old 01-17-2018, 05:25 PM   #8
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How long have the tenants been there? Are the rents at market? Above or below? What have market rents done in that area over the last few years? What has the neighborhood vacancy rate been over the last several years.

Class A, B or C neighborhood? The GRM varies with neighborhood quality.

Whether it is cash flow positive for her depends on her leverage. If it's free and clear, it would certainly be cash flow positive...

I agree with the 100 times gross monthly rent or less rule of thumb. On that basis alone, you would need to buy the property at $285,000 or less. There are exceptions, especially if the rent is significantly below market simply because the owner has not bothered to raise it. That's usually not the case - below market rent generally means the property is below market in its' attractiveness to potential renters.

Let's see her operating statements for the last five years. Then I might have a knowledgeable opinion about rents, vacancy and expenses...

Now, for you, the prospective purchaser. How much do you know about the math of investment properties? Have you read and understood the material in Frank Gallinelli's book? If not, here's the listing on amazon: https://www.amazon.com/Estate-Invest...ank+gallinelli

I learned my investment property math through my job and AIREA classes, but this covers the basics. If you don't fully understand the math, you should not buy rentals. Period.
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Old 01-17-2018, 05:28 PM   #9
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First question, do you want to be a landlord ?
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Old 01-17-2018, 06:36 PM   #10
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As stated by others, being a landlord is like a job. Might be part-time, but it is a job. Especially if you handle things yourself like small repairs up to major repairs. If you have a prop mgmt company take care of things, they take some percentage of the rent (approx 10% I think you will find is typical range). Plus they charge you for every repair or issue on top of the fee.

Real estate can be good, but just understand what you are getting into. It can be very good financially. It can also be physically and mentally difficult.
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Old 01-17-2018, 06:55 PM   #11
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They also will not be rented 12 months per year over and over. Need to consider vacancies. Are you using a property manager? They will take the first month's rent and 10% ongoing (in our area).

What about taxes? Homeowner's/condo dues? And the taxes that the previous owner pays could be way less than what the new owner pays.

Evictions/tenants trashing the place. (Ask me how I know...)

There's a lot to consider in addition to price and rent.

But you can also do very well. I bought a condo in 2013 and it has more than doubled since. Rents are skyrocketing.

It can be a good mix to your assets.
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Old 01-17-2018, 11:21 PM   #12
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Average and a little low on rent. But she just raised it with new tenants because last ones left. I was looking over the statements and it's what she says. No it's been cash flow positive with 20% on $315k purchase price with rents at $1100/month each side and taxes at $3900 last year but before that it was lower running around $3000.

I've looked at the repairs and depreciation schedules on the roof, water heater, furnance, etc.

I've only lived in places that were cash flow negative so I've never wanted to get into landlording. It's never made sense where I've lived. Most people I've known doing it were doing it for appreciation, not cash flow.

I've read a lot of books and attended the real estate club meetings and talked with a lot of people who are doing it and who have done it. I've been looking and carefully thinking for about 3 years.

I was thinking this would be a trial run. We might never go more in or we might move more into rentals.

Neighborhood is B. Will read Fred Gallinelli.

No property manager yet and testing this out. No RE is at least 10 years off. Just something to add to the mix. I don't think we need it but I want something different.
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Old 01-18-2018, 05:20 AM   #13
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Mortgage terms?

Let's see your projected operating statement, including all anticipated expenses AND the mortgage. I'm skeptical that this will be very cash flow positive, if at all over the long term.
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Old 01-18-2018, 06:24 AM   #14
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Experience across 8 units for me says assuming more than 10 months rent per year is a risk. People leave suddenly & then you need to rehab unit before can rent again.
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Old 01-18-2018, 08:52 AM   #15
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Not really enough info there to go on. If this is a long-term hold for you (say 10 years plus), you need to think about the direction the neighborhood is heading.

You also haven't said how much taxes and insurance are, those are typically the #2 and #3 repetitive monthly expenses after the mortgage.

And how actively do you plan to manage these? Are you ok with doing that? Do you know how to do something like replacing a faucet?
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