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Single Family Help

joe1234zz profile photo
  • Friday, January 23, 2004 @ 07:39 PM EST
  • 8 Comments

I have a question regarding a single family home. I found a home appraised at 93,500.00. I spoke w/a property manager who said I could get a 750/month rent from a home like this one.

Here are the numbers:

Rent: 750
vacancy: 60
Net 690
Mang: 48
Maintenance: 45
Utilities: 0
taxes: 116
Insurance: 38
PMI: 70
NOI: 373.01

So I could support a loan of 59,789.00 at 6.375% intrest for 30 years. By the way I was already qualified for 100% financing at 6.375%, 30 yrs. Which calcualtes to be a 7.5 ROI.

My question is this. Do you think this is a pretty good offer to make (i.e. 100% financed at 6.375% for an offer of 59,789). Also I purchased Mike Summery books, the weekend millionaire quide to investing in real esate. It mentions having a "cash flow". It says "you shouldn't enter into a deal w/o having clash flow". I don't have any cash flow here. But I am able to pay the mortgage payments if he accepts the deal. Does this kill the deal?

Or should I factor in cash flow of $50/month which will make my NOI (373-50=323/month) So I could offer him a purchase price of 51,774.00

Thanks

Joe.

Comments(8)

  • no photo
    OnTheWater21st January, 2004

    We try to make at least $150/prop after monthly expenses.

    I'd look at your numbers, and offer so that you make at least the above.

    When you have a bunch of props. then if you get one or two that break even, so be it as you're making at least 5%/year/prop simply via the growth in their equity.

    Thanks,

    OnTheWater

  • DaveT
    DaveT21st January, 2004

    Using your numbers, to get a Debt Coverage Ratio of 1.25, the most you can afford to finance is $44,850.

    If you can afford 80% financing, then your PMI goes away and your Debt Coverage Ratio improves as well. It appears that your proposed purchase price is a good target to make the property cash flow with 80% financing.

    At these numbers, 100% financing does not compensate for the negative cash flow.

  • no photo
    telemon21st January, 2004

    It's overpriced if the apprasial is 93k and the max rent is $750. Rents should be 1% of purchase price.

    BTW I am up in Dayton and can buy properties around 50k all day long that will section 8 at $750. Much better Return with a lower priced property.

    [addsig]

  • no photo
    joe1234zz22nd January, 2004

    so do you typically try for a Debt Coverage Ratio of 1.25 for each deal.

    -Joe

  • DaveT
    DaveT23rd January, 2004

    joe,

    Unless the numbers will allow a Debt Coverage Ratio (DCR) of 1.25 or better and an Internal Rate of Return (IRR) of 15% or better, the property does not meet my investment criteria.

    You can play with the amount of your down payment to adjust your DCR. Put more down and the DCR goes up. Putting more down, however, lowers your IRR. When used together, these two checkpoints will keep you out of a bad investment in long term rental property.

    The DCR tells me if the property's cash flow is good enough to support the property. Remember, you can't budget for unplanned repairs and maintenance. The IRR tells me how well my initial investment in the property is working for me. Each provides a check and balance and helps you make good business decisions.

  • no photo
    joe1234zz23rd January, 2004

    I wanted to say thank you for the comments and suggestions. I think I will pass on this property. What do you think about wholesaling it????

    -Joe

  • no photo
    joe1234zz23rd January, 2004

    Ok. Let me ask this question. Based on the numbers below.

    Rent: 750
    vacancy: 75 (10%)
    Net Rent: 675
    Mang: 48 (7%)
    Maintenance: 45
    Utilities: 0
    taxes: 116
    Insurance: 38
    PMI: 70
    Reserve: 75
    NOI: 283/month = 3396

    If I wanted a positive cash flow of 50-100/month what should my purchase price be???


    -Joe

  • DaveT
    DaveT23rd January, 2004

    joe1234zz ( Joe),

    Using your numbers, your NOI is $353 per month (PMI is not an operating expense). If you only want $50 per month cash flow, then you have $303 per month to apply to your debt service.

    Using a maximum debt service of $303 per month for (P&I), then your maximum mortgage amount is only about $48,500 (at 6.375% on an amortizing loan). If you plan to use 80% financing to avoid PMI, then your maximum offer price is around $60,625.

    If you insist on 100% financing and project a monthly PMI premium of $70, then only $233 is available each month for your debt service. This means that your maximum loan amount is only about $32,500. In this scenario, your maximum loan amount is also your maximum offer price.

    Note that I picked a $50 monthly cash flow. If you increase your cash flow requirement to $100, then your offer prices in each of the above scenarios is even lower.

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