What do you think of

[TMCG]

i just looked at a three unit where i live.  asking price 349k - dropped from 419k

been on the market for months.

the issues:
it is not ZONED a three unit.  Nor is it ZONED with an accessory, a multifamily.  

i took a look at it though, and with the exception of a few minor repairs - it is fully rented for a total of 2700 according to broker.

the repairs i speak of would be making it a legal two-family.  the basement could possibly make it a three unit, but i think the ceiling is too low.  the basement is actually not rented right now.  just the first floor and the second floor.  both tenants have been there for over two years and plan to stay - according to broker.  with some time, the rents could also be increased.  the one tenant, i believe takes care of the management of property as well for a discount on rent.  the units were clean and i met one of the tenants - a retired nypd cop.

i would have to hire an expeditor to look over the property to tell me what would need to be done to ZONE it at least a multi-family.  i could do that myself, but it would take longer.

my thoughts were to meet the seller - who owns 5 other properties and according to the broker is looking to liquidate one property for other investments.  

broker also said that a loan on the property as is would not be a problem because the seller has a mortgage through an aggressive lender who has already said they'd give a loan for 350k - 85% LTV.

more info to come.  if i saw this thing two months ago, i would have ran due to being afraid, but when i saw this property, something just said to me, "this could be a good deal".

i'm not thrilled with dealing with basically an illegal duplex currently, but the expeditor might help - and i just might have the seller pay for that report.  

on a side note - i also found an EXCELLENT price on a commercial property - priced in the mid 600's...but i would need some help on here to attract some investors...

please advise...

[propertymanager]

You ommitted the most important consideration for any investment property - CASH FLOW!  This one is a BIG loser, even if it is was a legal duplex.  

Operating expenses (including capital improvements) are about 50% of the gross rents throughout the US.  Therefore, your NOI would be about $1,350.  Subtract the $2,600 mortgage payment and you've lost a whopping $1,250 per month.  Combine that with the fact that real estate is just starting its downward cycle, and you'd have a real loser.

I'd pass!

Mike

[kdhastedt]

Mike's right...even as a tri-plex, this one is an alligator and we don't even know all the numbers...this will not cashflow!

We haven't even talked tqaxes, insurance, maintenance, management, vacancy, etc., etc...this is a real dog.

Keith

[yrush2000]

A long time ago someone gave me a quick method to even see if a property has cashflow possibilities..

Monthly rent x 12 months x GRM (gross rent multiplier)

Ask a local realtor what your GRM is, they should know.though many areas it is around 7.5...

so
2700 x 12 x 7.5 = 243,000  

depending on your mortgage product, I/O, option arm, fixed your looking at payments from $900-$2000 a month with 100% financing on.  Of course many investors are using option arms now to take advantage of strong cashflow but only use if you have a strong equity position of at least 20-25% in my opinion which you should if your buying right...

andrew

[TMCG]

GRM - hhhmmm...

so let me get clarification - this equation lets you know...what the price of the property must be in order for it to cash flow properly?

sorry....

[yrush2000]

The formula gives you a rough idea if a property can cashflow without several variables.  Just by knowing the monthly income and crunching some numbers on the calculator for 5secs and you know if there is a possible deal..

[propertymanager]

Here's an easier formula:

To find cash flow, divide the gross rent by 2, and then subtract the mortgage payment.  VERY SIMPLE!

Mike

[yrush2000]

property..in you formula you need to know the mortgage payment upfront.  The formula I am presenting is ideal when you do not know the payment yet.  

Also in many parts of the country, like my area in SoFl you will not get your rents to be 50% of the mortgage unless your putting down 50% of the purchase price.   I guess if your buying a home for 50-120K, that method would work as cashflow can be greater to a point since I have notice rents are get pretty stable and similar in many different markets.

by me, a 3/2 in a low-middle class area is still starting at $1300-1500 month usually.  House will still run you $275-330K...and yeah, no cashflow, even with a teaser loan..

[TMCG]

yrush,

that is the same challenge i face here.  again, i have yet to join my local rei club, but from the people i have talked with, most rehab and sell.  there are those that buy and rent, but like you said, they HAVE to be putting down a good chunk of change or buying foreclosed or seriously distressed properties.

[TMCG]

yrush,

i still don't understand the "243,000"  what does that answer represent?

what is gross rent margin?

[yrush2000]

The figure gives you a good example of how to know if you will have cashflow fast...now i will estimate some figures since I do not know where you are buying this property..but i will assume your not in an overpriced part of the country like me..

If your purchase at 243K like i calculate, and do 100% financing with an 80(I/O) at 8.25% and 20(fixed) at 12% your looking at $1840 PI..
taxes and ins about 300 a month..

1840+300=2140
NOI of 2700-2140=560.  
Still you need to add in vacancy and repairs...plus PCF..
so going by that number of $243000, it would be absolute highest you want to pay and still may just come with breakeven cashflow if place is occuppied and no sudden problems that cost money ....

Since itsa triplex, you want to cashflow anywhere from $300-700 a month depending on what your looking for..will you get it..Be very hard...

Now if you plan on using option arms you will since payments will be under $1200 a month but the neg. amortization will caluculate to about 10% a yr so if the property does not appreciate at over 10% a yr you will be in trouble..

A gross rent multiplier is just a number realtors have down here..I know in many parts of the country they have them for counties to determine market rents..
In SoFl it is usually 7-7.5%..I have talked to other investors in states like Texas where they use about 8.5-9%

You have to always remember to add fees to your expenses for things like maintance, vacancies and advertising to name a few. Depending on your area, you may have to pay utilities as well.. I also like to put money away for roof damages but thats because I live in Fl with the last several hurricane seasons we have many damaged roofs...

[propertymanager]

Yrush,

With all due respect, you don't have a handle on your REI terms.  

NOI is not gross rents minus PITI as you stated.

NOI (net operating income) is gross rents minus all operating expenses and does not include Principle and Interest (your mortgage).  In fact, NOI is gross rent minus all expenses EXCEPT principal and interest.  After you determine NOI, you subtract principal and interest to determine cash flow.

I would not recommend using interest only or negative amortization loans to purchase rental properties.  That is a recipe for disaster!!!

Mike