Would You Do This Deal?

3br/1ba Phillie Row House, appraised at $72k... puchase price - $64.8K (10% below appraisal).
No money out of pocket... seller pays closing cost.
Sec. 8 rented at $710/mo. with lease until 10/31/06. property mgmt in place.
Cashflow= $65-70/mo after PITI, mgmt fees and reserves of $250.

Any input would be appreciated. I am back and forth on this one...and wanted to get other opinions.

Thanks![ Edited by mots32 on Date 01/12/2005 ]

Comments(22)

  • LadyGrey12th January, 2005

    What kind of appreciation is the area it's in getting?

    Also, it depends on what kind of returns you expect on your money, what kind of investor you are. Some people buy new construction because certain maintenance issues are not likely to happen., and are fine with making nothing (breaking even) because the appreication will pay off in time.

  • NewKidinTown212th January, 2005

    Should we assume that the property will continue to hold its value or even appreciate some more? If so, I don't see anything wrong with your deal. Someone is basically giving you their property and paying you $65 a month to take it.

    Since you have no money out of pocket, your cash on cash return is infinite. If the cash flow is good enough for you, and if the property is in good enough condition that you feel a $250 monthly replacement reserve is sufficient, then go for it.

    Do it a few more times, if you can.

  • commercialking12th January, 2005

    Yeah, I'd do that deal.
    $250 per month in reserves is high and I like Philladelphia.

  • JohnMichael12th January, 2005

    I would not do the deal, just to little of a cash flow!

    Send it over to me I can handle such a problem!

    Just kidding

    This is a good deal now out of pocket, small profits but great opportunity to control a property.

    Jump on this one if all your numbers are correct!
    [addsig]

  • kburke12th January, 2005

    Let's see, infinite ROI, hummm. Yea I'd do it.

  • mots3212th January, 2005

    Thanks all...

    $250 reserve was actually for the year.

    Just a little nervous of unforeseen expenses, which would kill cashflow for quite awhile.

    Would any of you buy a home warranty under this condition?

  • kburke12th January, 2005

    mots,
    I use 10% of income for vacancy and repair reserves. So far we have been fine. If we did any less I suspect we could get in trouble. We have very little vacancies in our area so I would adjust your numbers accordingly. If you have your own cash reserve that you would be willing to put into the house in case of emergency I might do the deal. You also have to consider that rents almost always go up. Your cash flow now is not what it will be in a couple of years.

    We never purchase warranties. Nothing scientific just doing what a couple of gurus told me.[ Edited by kburke on Date 01/12/2005 ]

  • mark136912th January, 2005

    I would pass. It looks too slim for my taste.

  • LarryNut12th January, 2005

    I just noticed you only need to finance 64,800 instead of 70k so you should be able to lower your piti even more, thus increasing your cash flow even more.

  • dontaskwhy12th January, 2005

    I see the appreciation percentage thrown around quite a bit on the site. How would one come by that number for a particular market?

  • mots3213th January, 2005

    Thanks Larry

    Here are my monthly numbers... seller is paying closing costs.

    Sec.8 Rent = 710

    PI- 431 (on 64800 loan at 7%)
    Taxes- 52.50
    Insurance - 46.00
    Water- 40
    PM- 50

    Total expenses with out reserves=619.50

    Cashflow=90.50

    I noticed your PITI is higher than my PI... what interest rate did you get?

    Appreciation has been high in that neighborhood...but I think we can expect 10%

    Would you buy a home warranty in this situation...about $500.

    Thanks,
    [ Edited by mots32 on Date 01/13/2005 ]

  • bgrossnickle13th January, 2005

    How difficult is your life when

    1) a pipe bust and causes $1000 of damage?
    2) a tenant leaves in the middle of the night with damage equal to security deposit + $300 and it takes you two months to get the apartment rented?

    Brenda

  • bgrossnickle13th January, 2005

    "worst case"??? I have 16 SFH. Right this very minute I have on my plate 1) $1500 from falling tree damage 2) $3000 because the drainfield is bad 3) $350 from a old garage door that needs new rollers and gears 4) unknown air conditioning repair 5) delivering a 3 day notice at lunch for $900 6) and 4 tenants were late this month.

    No idea how long the average tenants stays. But I would guess about 15 months. It takes me six weeks to rerent a place. So every 15 months - if the tenant was not already behind on the rent and had an adequate security deposit - I still have to pay for some minor repairs, pay to turn on the power and water, run ads in some paper, and put up signs, while the place sits vacant. Heaven forbid should you have to evict.

    $250 in reserves is nothing, if that is his only reserve. And at $90 a month, he will not be adding to his reserves because the first time something breaks, that $90 and then some is gone.

  • mots3214th January, 2005

    Thanks all.

    There are some positives about Sec 8 that I think is being overlooked.... rent is guaranteed from the government and you receive it from HUD directly on the due date... so you never have to worry about late payments. Mosts Sec 8 programs have a very long waiting list... so once they are in the program they don't want to screw it up and risking getting kicked out of the program.... by trashing the place. I'm also not concerned with vacancy as this point as there are 22 more months left in the lease.

    This is a first deal for us, other than a SFH we rent out locally.

    I don't want FEAR to stop us...but I also don't want to be foolish about it either.

    Thanks for all you comments!!

  • mots3214th January, 2005

    Should I consider taking a 5/1 fixed ARM to finance this property? It certainly would bring my cashflow up. Has anyone used this mortgage type to finance their properties..

    Thanks!!!

  • asTTro_boy17th January, 2005

    Hey mots,

    Where in philly is this place? I've become pretty familiar with the area and maybe I can lend an opinion re: future appreciation if you're not from the area.

  • mots3217th January, 2005

    Hi AsTTro

    The property is in SouthWest phillie, Elmsford area.

    What do you know of it?

    Thx

  • fdi17th January, 2005

    The first thing I would do is set up parameters to determine what a good deal for you is. Focus on apprecitation and cash flow. i am still learning, but your numbers are too low for me. I look for a 30% positive cash flow on rentals. Assuming a 10% vacancy rate, you will lose a significant portion of your cash flow for the year. As for reserves, I normally set aside $500/year. Lastly, ask a realtor to provide you with comps for the past 90 days...I trust comps more than I do appraisals. I want to know what people are paying, not what the property is worth. You may have more or less equity than you think.

    wishing you the best.

  • asTTro_boy18th January, 2005

    Quote:
    On 2005-01-17 18:13, mots32 wrote:
    Hi AsTTro

    The property is in SouthWest phillie, Elmsford area.

    What do you know of it?

    Thx


    Hmm, sorry I'm not terribly familiar with SW Philly, but I did ask some of my friends. Basic verdict is that the area certainly isn't the worst (NW Philly is) - but it's not the safest or nicest place. But you already knew this considering it's a Sec8.
    It's about 15 - 25 blocks to UPenn - which would be a better area regarding revitalization potential - but I don't think this area will benefit much at all from that.
    Though there are some plans in motion to help change that - check out these sites and do some more research to make a better informed decision.

    http://www.southwestcdc.org/economic_development.html

    http://www.trfund.com/about/Press%20Releases/pi041901.htm (older announcement, 2001)

    http://www.phila.gov/ohcd/conplan28/28west.pdf and http://www.phila.gov/ohcd/

    Again, there are worse places in Philly - but this one isn't far away. That being said, I would focus more on the immediate return this place will bring you, than the long term.

  • robshap18th January, 2005

    I'd factor in depreciation in my investment decision. You can depreciate the value of the building (not land) over 27.5 years. This can amount to a significant tax savings. You will have to add the depreciated amount to capital gains when you sell but you can do a 1031 to delay capital gains. I don't mind a small cash flow or even slight negative when considering depreciation and decent appreciation. Go for it!

  • AptHunter18th January, 2005

    It all depends on the rate of appreciation. If its about 15% a year, Id do the deal, otherwise Id pass...
    Even at 10% a year, its only a total of 21K gain over 3 years.
    Dont get lured by purchase price, i.e. a 200K house with zero down, rented for 1200/mo. with a rate of apperciation of 10%/yr. would make you 60K over the same period and the level of effort would be the same (if not less - since it would be non-Sec. 8)

  • asTTro_boy20th January, 2005

    (Sorry - slight Hijack)

    AptHunter, would you ming expanding that math you give below. I'm a newbie and would just like to understand this comment as best as possible.

    Thanks in advance

    Quote:
    On 2005-01-18 18:02, AptHunter wrote:
    It all depends on the rate of appreciation. If its about 15% a year, Id do the deal, otherwise Id pass...
    Even at 10% a year, its only a total of 21K gain over 3 years.
    Dont get lured by purchase price, i.e. a 200K house with zero down, rented for 1200/mo. with a rate of apperciation of 10%/yr. would make you 60K over the same period and the level of effort would be the same (if not less - since it would be non-Sec. 8)

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