Investment Property - Is my thinking correct? Experienced guys please advise

Hey,

I am looking at buying my first multi-family duplex. I did my analysis on the property over an 8 year hold.

Property is foreclosed and asking price is $85,000. Bought in March 2009 for $130,000.

Rent is under market valued currently at $1700 for both. Market value rent is around $1900.

It is in a 'rougher' neighborhood, but up and coming.

Brand new leases for the tenants. Tenants did their own work on the apts worth about $30,000.. thus the lower then market rents.

Mortgage: $80,000 @ 4.5%
~4,000 in operating expenses. I assumed $1000 a year for maintenance. all other #s are from the properties realtor
Debt Coverage of 2.90
IRR: 226%
Cap: 19.3%

In my calculations I assumed fixed rates (expense, rent) across all 8 years (for simplicity) and $1700 total rent throughout as well.

How do these numbers look? What should I be aware of being speaking with the Realtor/bank about this deal? What could I possibly be missing to look at that could effect my numbers?

Any advice before proceeding?

Thanks

 

Be VERY VERY CAREFUL if you are dealing with Section 8 tenants. Wannabee landlords assume that Section 8 is a sweet deal, because of the portion the feds pick up...they rarely think of how tough it will be to collect the rest.

Building on this point...as a landlord, YOU will have to collect if they don't pay. Going through the eviction process can be very nerve racking and knocking on doors with a scowl is not for everyone. Remember that very few people living in shitty areas are the bleeding heart "good people in need" headliners. Shit attracts shit.

Therefore, have a plumber, structural engineer and general contractor check the place out in detail. You are likely to have tenant related headaches, so make sure you don't have to shell out a ton on repairs (this is something that is very difficult to project going forward).

Remember projections are very tough when it comes to foreclosed properties as there is usually something you don't know about bringing the value down (outside of repo/foreclosure issues). The best thing you can do to protect yourself is to do your homework on the structure itself. The numbers look okay, just do the homework and you'll be okay.

Those warnings in tow, best wishes.

 

Not very seasoned in RE, but I know a few things.

  • If you won't accupy the premises you probably wont get 4.5% interest rate. I was told by someone recently that investment property is usually 1+% higher rate. I'd probably assume 6%.

  • Are you planning on hiring a property manager? I definitely will if I buy investment property. I think 8% is that standard charge out here, but I could be mistaken.

  • I don't know the cost but you didn't mention insurance. I'd get ballpark estimates before assuming anything.

-Did you account for vacancy periods?

  • Finally I think ALL invenstment properties say the current rent is under market. I'd make damn sure it was well under market value before I buy that (why wouldn't the current owner have rented it at market value if they could have easily)

Just out of curiousity, what area are you buying?

twitter: @CorpFin_Guy
 

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