Please Analyze This Deal (Investment Property)
2 bedroom condominium in Jersey City NJ (Journal Square area) in elevator apt. building.
Purchase price of $128,000
Taxes of $963 a year
Common Charge of $150 a month
Presently rented @ $1,100 a month. Tenants have been living in apt. for 2 years.
I am planning on putting down a total of $15,000 (including closing costs).
I have spoken to several mortgage brokers. Based on my credit score & income, I can get a loan for this at around 6.5%.
Is this a good deal??? What other things should I consider??
Thanks
Is this a good deal??? What other things should I consider??
IMO: take into consideration,
1) 1% rule
2) negative cash flow
3) lotta cash outa pocket to close
4) condos are (often? sometimes?) harder to resell than some other types of residential income props - would really want to see a better deal or cash flow to take on a condo.
5) Is the $1100mo. rent the market value for that unit? (ie: comp rent prices)
These are just a few thoughts that popped into my mind when I read your post. Don't let my words discourage you - work your numbers and make sure it makes sense on paper.
For this deal, I kinda worked this from what you wrote:
128,000
12,800 down/10% (assume approx)
115K loan @7% is
775/mo loan payment
150/mo common charge
80.25/mo taxes
***No mention of Insurance cost***
Total= 1005/mo
You need to add in the insurance cost broken down to the monthly cost.
You need to add in any maintenance costs.
You need to consider vacancy.
Looks like a negative even without vacancy - and even 1 month vacancy could get expensive.
IMO: take some time to grasp the 1% rule and why it is a good rule of thumb. 1% meaning: that any monthly income, (rent), should represent at least 1% of purchase price. With your deal, purchase price 128K, I would want to see a comfortable 1280/mo income with some room perhaps for a rental increase.
Hope this helps. Good luck,
noel
Nick,
My quick calculation gives for monthly estimates:
Income $1100.00
Loan Service $790.11
Tax $ 80.25
Association $150.00
For a monthly cash flow of
$79.64
This does not include vacancy factor, assessments or repairs (assume you are managing yourself. If you are expecting large appreciation and can stand some expenses this may be OK, but I am not excited about the cash flow.
This assumes I have not made any computational mistakes.
I hope this is of some help.
Happy Holidays,
Ed
return in real dollars is approx. 8% unless you are looking at a large increase in property values in your area i would leave it alone...condos have variables such as raising association fees & special assessments that can destroy cash flow...there is no room for comfort here...you should be able to make at least $300.00 a month cash flow at a minimum to even consider this...move on there are more profitable deals out there...just my opinion....merry christmas
Don't forget utilities? Does the tenant pay for it? Is it included in the association fee?
I am not too excited about the $80 monthly cash flow. If you can not find another investment that yields more than 6.4%, then this may be allright if you have cash reserves to handle the unplanned repairs, and the temperment for landlording.
A couple of things going for you is that the current rent can be raised to improve your cash flow on the next lease renewal, landlord insurance should be fairly cheap since you only need liability and personal property coverage. I am hoping that this condo is in a desirable building with adequate demand for either renters or buyers.
Negatives include the PMI on the mortgage, the association fees may increase dramatically next year, and there may be a special assessment if replacement reserves can not handle a costly maintenance item.
well, lets see, 30 year @ 6.5% is $715 per month, +$80/ mo taxes,+$150/mo =$945/mo ....... with an $1100/mo rent, you'll get your $15000 investment back in about 8 years assuming no holding costs, repairs, or other unforseeables
If you're borrowing the $15000 you might have a break even or slightly positive cash flow. So....this might be a good deal if the property is expected to appreciate in the next few years, but if not I'd move on...just my opinion
NO It is not a good deal!
My projections say:
Purchase Price $128,000.00
Down Payment 12% $15,360.00
.
Loan Amount $112,640.00
Intrest Rate (% per year) 6.5%
Term of loan (years) 30
Settlement fees
Origination fee 1.0% $1,126.40
Discount fee 1% $1,126.40
Closeing costs & misc. fees 2.0% $2,252.80
Total settlement $4,505.60
Total cash outlay $19,865.60
The Loan
Monthly payment (principle & intrest) -$711.96
PITI (Principle, Intrest, tax, Insurance)
Investment Analysis - Settlement fees paid by buyer
Monthly Yearly
Cash outlay $19,865.60
Total opporating income $1,001.00 $12,012.00
Less: Total operating Expenses $265.25 $3,183.00
Net Operating Income $735.75 $8,829.00
Less: Loan Payment -$711.96) $-8,543.54
(Priciple & Interest)
Cash Flow $23.79 $285.46
Cash on Cash ROI 0.12% 1.44%
Investment Analysis - Settlement fees added into loan
Monthly Yearly
Cash outlay $15,360.00
Total opporating income $1,001.00 $12,012.00
Less: Total operating Expenses $265.25 $3,183.00
Net Operating Income $735.75 $8,829.00
Less: Loan Payment -$740.44 $-8,885.28
(Priciple & Interest)
Cash Flow $-4.69 $-56.28
Cash on Cash ROI -0.03% -0.37%
What is the point of negative cash flow? This doesn't account for much in repairs or the $150/month either. If you can afford the negative cash flow. . . Your lieing!
[ Edited by jpchapboy on Date 12/23/2003 ]
May be OK if a zero down no qualifying. Otherwise it ain't so hot
Good LUCK and HAPPY HOLIDAYS
Hope this helps some
Ted Jr
any time i buy property regardless of what the numbers say i ask my self "what if i have to put this property up for sale today what is its weakness." to me this property has two resale weakness first it is a condo and not mainstream selling property and second it only has two bedrooms. if you are a inexperienced investor i would walk away and go for the "cookie cutter homes."
You may be able to get it to cash flow a bit (with a favorable wind! ), and it will appreciate, but there's nothing about it that is creative or excites me (which is usually my best monitor for when I should move on and keep looking).
Perhaps it's not a bad deal to get your feet wet, but you're conventionally purchasing a property at fair market value.
To many negatives. I would walk away and find another deal somewhere else.
You will be able to find much better deals, just be patient and keep looking. Good luck
This deal may not be all negative. Jersey City is becoming , if not already a hot area. Check out the pricing for other apartments. Talk to realtors about the availability and pricing of rentals.
Anyone who bought in nearby Hoboken a few years ago are sitting pretty now.
Is the building close to the path station?
Hey Nick,
If you are in the same boat as the majority of users of this forum ie: don't have two pennies to rub together, then as has been stated the deal isn't what they would consider a great one.
However, if you just happen to be a citizen and have cash on hand, and a good stable income and are just looking toward your future with some good investments in realestate, then this could be a fine deal for you.
I realize that for some people they aren't interested in all kinds of slippery techniques to acquire property, but have more conventional means. If you are in NJ this property is probably going to appreciate faster than most other areas of the country, so if you think it is a good stable place with long term appreciation and you have the current funds on hand and the income to support this place if an emergency comes up without changing your lifestyle drastically, then I say more power to you.
A 2 year renter means you have more than an above average chance that they will probably be staying on for a while and that can take one head ache right out of the picture for you.
Be careful, This deal could end up costing you more than you expect. Your known expenses as opposed to your known income seem to be short. Would raising the current rent be an option? Personally, I would try to restructure this one to allow less down and less per month. If for some reason this unit becomes vacant, then you've got a big problem (Unless you are cash heavy)..
Nick,
You might check out the new tool under MYTOOLs in your MYTCI . joel has placed a tool called ProForma-nator that will help you analyze deals.
Regards,
Ed
Great advice!!
Yes, there may be some 'risk' invoved here BUT the market in Jersey city is hot, especially the downtown & Journal Square area & I can do some improvements & probably resell the place at or above 200K.
Keep in mind things happen. what if your renters for whatever reason quit paying? Do you have the reserves to pay even though you are not collecting? Cost money to evict and to relet.
[addsig]
This was a great thread to read.....!
Alot of good and alot of bad advice here. this is not something to get emotional about. You have to look at the raw facts and numbers. Monthly cash flow isnt the only thing to look at in a deal like this. You have to think about things like vacancy rates, inflation, interest rates and a ton of other things. Having owned quite a few rentals I can tell you that it can be rewarding if its done right. You didnt really explain things like vacancy rate in the area of the proposed purchase nor what the appreciation rate is on something similar to this property. Putting $15k down on a deal that will net you little each month is risky. Do you have the money to cover the fees and the mortgage if you were to get a vacancy.And what if you had trouble renting the unit out if it became vacant?
What if the tenants damage the property if you had to evict them ? These are only a few of the common problems that may arise. Use everything possible to get an idea of what you are getting into.
Quote:A lot of good and alot of bad advice here. pcglobal,
You will have to explain this comment. I thought NickL received both optimistic and pessimistic opinions but I did not really see any bad advice.
Because NickL did not give us much information about his landlording experience and his financial strength, about the property, the area, and the property's future appreciation potential, we all made certain assumptions.
Those with optimistic assumptions seemed to make generally supportive comments while those with pessimistic assumptions tended to give negative feedback.
In Ron Starr's article on Advice for the Beginning Investor (see the articles archive), he mentions three elements of investing that specifically apply to landlords. He even gives an acronym -- CAT -- as a mnemonic device for the elements.
C = Cash Flow
A = Appreciation
T = Tax Benefits
Ron Starr explains that a potential rental property investment needs to satisfy at least two of the three elements. In NickL's case, it appeared that his cash flow was about break even, but the property could still be a good investment if the prospect of future appreciation is attractive and if NickL can take advantage of current tax benefits that typically accrue to a rental property.
The best advice we can give NickL is to read Ron Starr's article, then evaluate this investment in terms of CAT. Based upon his evaluation and his tolerance for landlording, NickL should decide whether this investment property makes sense for him, in his present financial posture.