Author Topic: Rental Property Evaluation: Update & Mortgage Question  (Read 2221 times)

Enough

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Rental Property Evaluation: Update & Mortgage Question
« on: January 20, 2016, 04:06:07 PM »
Looking to purchase my first rental property.  It is a triplex with 2x 1BR, 1BA units and 1x 2BR, 1BA unit.   The attached file is the evaluation tool from Frugal Vagabond
It is tenant occupied, 400, 475, & 500/mo & all tenants are all on their second or third lease renewal per seller.
Maintenance & Repair costs are per seller (2014 costs) - they seems high, but no additional detail, likely contracted out.
Insurance cost is per seller
Electric, Water, & Sewer is per utility company provided to listing company
PM, tenant placement, and lawn care are estimates, but would be done by me for first 1-2 years

What I like: 
Proximity - My own home is ~3 blocks away and I drive by the triplex on the way home from work every day. 
2 Car Garage - Future workshop with unfinished loft (future studio rental?)
Neighborhood - Despite the low rents, it is in a low crime area (experience and trulia crime data)
Length of current leases - low turn over

What I don't like:
Financing - $69k asking price (which I think i can get down to $64k) seems just too low for a mortgage 25% down would mean a $52k loan which is too low for many lenders and means a high closing cost to loan ratio.  I'm looking into other options (heloc on current home, family loan, seller financing).
Air conditioning - All units have central heat but window air conditioning.
Personal Uncertainty - I know I will be in the area for another year (maybe two) for work, but beyond that, I would like to move back home (~2 hrs away).  Purchasing real estate lowers that flexibility.

Thoughts on financing? On moving in the future? Good deal or bad?
« Last Edit: March 11, 2016, 10:26:51 AM by Enough »

Letj

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Re: Rental Property Evaluation
« Reply #1 on: January 20, 2016, 04:53:19 PM »
The purchase price sounds great providing that the house is not a wreck. Just make sure you know the neighborhood personally and it's not a war zone.

jnc

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Re: Rental Property Evaluation
« Reply #2 on: January 21, 2016, 06:03:42 AM »
You can still get a loan for 50k or more. I have used Supreme Lending for instance to close on a few mortgages in that range. I definitely agree with the high closing costs to loan ratio.

Does seem to provide a good return as per your numbers.

PM is usually around 10% of the rent. In addition to that, they might charge you anywhere from 50% to 100% of the first month of rent if they have to find the tenant for you.

iamlindoro

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Re: Rental Property Evaluation
« Reply #3 on: January 21, 2016, 07:57:01 AM »
Hey there!  So, bearing in mind that this is a triplex, some things to consider:

1)  You have a 10% Cash on Cash return, which is (+/- 1-2%) pretty close to a total US stock market averaged annualized return.  That being the case, you have to ask yourself whether it's worth taking on the additional risk or a real estate investment is worth it to get the same, or close to the same, return.

2) You have three sets of mechanicals (hot water heaters, electrical panels, furnaces, etc) to maintain, meaning your long term capital costs are going to be higher than with a SFH or a duplex.  Based on this, the maintenance numbers you're getting may actually be high average long term numbers for the property.  Maybe the seller would be willing to provide a Schedule E for a few more years to see.

3) I know you said that you are going to do tenant placement for the first few years, but it might be worth at least seeing how tenant placement fees affect your budget in the event that an unexpected move, serious injury, or whatever causes you to rely more on property management.

When I adjust your numbers to show you paying 1.5 lease renewals and 1.5 tenant placements per year (roughly in line with a 2 year tenant stay assumption), your monthly cashflow drops to around 8%.  To me, this property is kind of in the "danger zone."  It could be ok to decent, and it could also get bad, quick, if you accrue a lot of capital expenses (or develop a nasty water leak, or whatever) in the first couple of years.

As jnc mentions, a 50K (or even sub 50k) loan is definitely doable.  I have two right now that were under 50K at close. and one just over it.

Water has proven to be a disappointment to be in one of my duplexes over the past year.  Tenants have no incentive to limit their use without some financial consequence.  I'm actually moving to submetering my utilities, dropping rents, and making tenants responsible for the water bill.  Every landlord in the area where I'm focusing right now seems to be trying to take some sort of step to make the tenant preserve water, whether it's agreeing to pay up to a certain value per quarter (in which case good luck proving that it's a single tenant's fault with only one meter), submetering, or whatever.  Something to consider, whether it's in this property or the next.
« Last Edit: January 21, 2016, 03:48:34 PM by iamlindoro »

Enough

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Re: Rental Property Evaluation
« Reply #4 on: January 22, 2016, 11:29:04 AM »
Thanks for the feedback.  I'm going to go forward for now, but stay conservative and only purchase if I can get a good deal on the financing or the price.

Bobberth

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Re: Rental Property Evaluation
« Reply #5 on: January 23, 2016, 07:37:21 AM »
I don't know your rental market, but I personally try to focus on properties/units that can rent for more than $600/month. Less than that and the risk from repairs and expenses is too high for me. A new water heater will cost about $400 all in to install by yourself. That is an entire month's rent at $400/month. At $600/month, it is 66% of a months rent and at $1000/month it is 40% of a month's rent. All for the same water heater that will work in all of those rentals. The percentages work with all expenses/repairs small or large-a furnace check, a drain cleaned, new refrigerator, carpet cleaned, new carpet, new toilet paper holder etc. I do most of the work myself or directly hire those that do the work instead of a management company or general contractor. If you were to go that route, you may want to aim for higher rents to keep your repair percentages low. For higher rents, you also get bigger security deposits to better protect you from tenant damages. A $600 deposit will cover more damages than a $400 deposit. Yes you will have tenants that do a lot of damage at times but I think most damages within the realm of "normal" in the size and type of properties I invest in can be covered with a $600-$700 deposit. I also prefer to manage tenants for more money instead of less per month.

Not to say that this property isn't a good investment, just a few things to think about that don't show up in a standard analysis. I know other landlords around here that do invest in $400/month 4 families and say that they are happy with the results.

clarkfan1979

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Re: Rental Property Evaluation
« Reply #6 on: January 23, 2016, 03:15:47 PM »
If you have enough in reserves to cover any potential losses, then go for it. Even if you don't make a lot of money on the deal, it could be a good learning experience. Most landlords didn't do that well on their first deal because they lacked experience. It is really easy to sit on the sidelines the whole time waiting for that "perfect deal" No deal is perfect.

Enough

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Re: Rental Property Evaluation
« Reply #7 on: February 09, 2016, 03:13:53 PM »
Just a quick update.  Seller accepted the offer today for $63,500 which will definitely help out on the ROI.  Looking forward to getting experience as a landlord and just a little bit nervous.

iamlindoro

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Re: Rental Property Evaluation
« Reply #8 on: February 09, 2016, 03:27:57 PM »
Just a quick update.  Seller accepted the offer today for $63,500 which will definitely help out on the ROI.  Looking forward to getting experience as a landlord and just a little bit nervous.

Congrats!  Best of luck!  The nerves definitely decrease with time and practice.  You feel like a big fraud pretending to know what he/she is doing, and then find that you *actually* know what you're doing one day :)

Enough

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Re: Rental Property Evaluation - Update w Mortgage Difficulty
« Reply #9 on: March 11, 2016, 09:56:00 AM »
Wanted to post a quick update and ask if anyone had experience or advice to offer on the issue I'm encountering. 

Working with the lender, everything was going well until the appraisal came back.  In a 2.5 mile radius, there were zero triplex sales last year, only one the year prior, and only one the year before that.  As a result, the appraiser used duplex and four-plex sales as comparables with a large adjustments for the number of units (gross adjustments ranged from 35%-78% on the three comps).  The lender, wanting to sell the note rather than hold for 30 years, is requiring the maximum adjustments for comps to be 15% net / 25% gross. 

I am working with the lender and appraiser to add the only two triplex sales to the appraisal (going 3 years back), but I do not think that is likely they will do that.  The other option is have a written appeal to the bank's loan review and ask them to reconsider holding the mortgage for 30 years (I would have to provide new comps or have an argument on why the appraisers large adjustments don't add risk).  It is not likely that the appeal would work either.

The only other solution that the lender is offering is a 20 year commercial loan.  It would have a similar starting interest rate, but is adjustable every 5 years and has higher closing costs.  I am wary of this option as it would reduce cashflow further and add additional uncertainty with higher mortgage costs every 5 years.

The offer had closing in ~2 weeks, so going to a new lender is not an option with that time frame.

At this point, I'm out $2k in inspection, appraisal, and earnest money costs, but I am trying to not let that sway my decision to get a commercial loan if it is no longer a good investment...  Thoughts? 

Another Reader

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Re: Rental Property Evaluation: Update & Mortgage Question
« Reply #10 on: March 11, 2016, 11:07:33 AM »
The bank is not interested in giving you a 30 year fixed rate loan.  Those are only profitable if they sell them.  The commercial loan is lower risk and more profitable.

The appraisal is the thing keeping you from closing the deal with the loan you want.  How likely are more triplex sales over the next five years?  As long as there good sales at some point over the five years, you should be able to refinance into a 30 year fixed rate loan.  There is a significant risk that rates will go up, but buying with a plan to refinance is an option to consider.

Enough

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Re: Rental Property Evaluation: Update & Mortgage Question
« Reply #11 on: March 14, 2016, 01:23:13 PM »
I researched and wrote an appeal with my own appraisal using older comparable sales with minimal adjustments.  The bank wrote a nice two-sentence response that they, "agree that the comps provided support the value estimate, but inclusion of older sales would not make the note salable on the secondary market - sorry".  So recent comps with high adjustments or older comps with low adjustments - neither are a go.

Any investors here have experience with the standard commercial loans - 20 year, adjusted rate every 5 years?

theSlowTurtle

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Re: Rental Property Evaluation: Update & Mortgage Question
« Reply #12 on: March 14, 2016, 03:08:54 PM »
Seller finance?