Does This Deal Make Sense

I have found a three unit building in college park md walking distance to the University of Maryland. This building is amongst several similar to identical buildings square flatroofed buildings that are always occupied by college students. For this reason I know that there will always be available renters.

the asking price is $450,000.

the top floor (2br 1 ba) is leased for $1400 until aug 05 and is already on the market for $1450.

the 1st floor (2br 1 ba) is leased for $1400 until aug 06

the basement(2 rooms a kitchen and bathroom) is leased for $100 till aug 06

that totals $3800 current monthly rental income

the seller says he can provide verification of a $400/ month averagre utilities (gas electric and water)

taxes $300/month
insurance $150/month
license and trash $100/month
grass$350/month although i figure i can just give someone a break of $100/month on rent to mow the lawn
which would save $250

that totals $1050-$1300/month

the cap rate is 7 1/2%

all three bathrooms have been replaced as have two of the kitchens (the other was in good condition)

the roof is 13yrs old
and the hotwater boiler furnace is about 20yrs old
there are also window ac units on the top two floors


can someone give me some advice. if purchased this will be my 1st investment property. does this deal make sense

Comments(10)

  • Slidell30th June, 2005

    New at this myself but using these numbers:

    Gross Operating Income 3800
    Less your expenses (1300)

    Net Operating Income 2500 per month

    Depending on how much you finance your note will be close to your NOI you may be negative in this deal. Plus this does not assume vacancies and maintenance allowance. With alot of college students as tenants you can count on some short term vacancies. From what I keep learning most like to see a cap of 10%.

  • flix_mm30th June, 2005

    thank you. if i should look for a cap rate of 10% or better should i just leave this property alone or should I just offer a much lower price

  • edmeyer30th June, 2005

    I did not see any repair and maintenance or vacancy factor in your numbers. Do not rely on ratios such as cap rates when making buying decisions. You need to do a full cash flow analysis which includes loan service.

  • hdhill30th June, 2005

    I agree cap rates are just the starting point, overall if this were my first deal I would keep looking, You can do better, just my two cents.

  • flix_mm1st July, 2005

    thank you very much. what do you think about making a lowball offering figure. is there a maximum amount that would make this deal work

  • NewKidinTown21st July, 2005

    Tell us more about your financing terms.

    In my area, one small regional bank I work with will only give a residential loan up to $300K on investment property. Above that they direct me to their commercial loan division. The Commercial division requires that I have at least a 20% equity stake and the loan amortizes over 15 years.

    What is your lender telling you about your financing terms for a loan this size?[ Edited by NewKidinTown2 on Date 07/01/2005 ]

  • edmeyer4th July, 2005

    flix_mm,
    There may be several factors that may determine the "maximum" amount. Two that come to mind are the appraised value and minimum cash flow you can live with.

  • flix_mm5th July, 2005

    I am still waiting for my lender to give me financing terms. as far as minimal cash flow, I know the property is in a great area right behind the university of md so I know it will appreciate, therefore I would accept a minimum of $300-$500/month

  • curtbixel5th July, 2005

    How do you know the taxes will be 300 per month. What property value was this figure based upon. When you purchase the property, it will be revalued at the purchase price. You need to figure out how much you will be paying in taxes when they are based at this new rate.

  • rmdane20007th July, 2005

    this has been discussed recently in another posting, the main scam is he sends you more than the amount you need and wants you to send him the difference (likely a fake money order or similar)

    Other than that...do a background check as well as you can

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