20yrs Old: Time for Multi-Unit

[G_Alexander]

Hello Fastlane Family, how has everyone been?

As you know I value all of your opinions, that is why I come here; to share my experiences to help you learn, and ask for help when I venture into a new arena.

Well, this time I am asking for help. I will be talking with 3 of my close apartment investing friends, but I would still like to hear what everyone here thinks.

I have located a duplex property in which I can assume the loan, details below:

The apartment is located in Cedar Rapids Iowa, about 20 minutes from my school. The property is a 1400sq foot Duplex built in 1916 and the deal is a loan assumption. Both units are, 1-Bedroom 1-Bath. The current owner is a guy in his mid 20s, he owes $75k and has already made 39 payments. The apt. supposedly would appraise for 85k (I take this with a grain of salt). Monthly payments (debt-servicing/insurance/etc..) total $645. Rents total $875.

He wants $2000 down and I take over the loan. Roof is under 10 years old. New water heater in 2001. Hardwood floors. 1 mile from 2500 students (Coe College) and roughly the same distance to two other larger colleges, including over 30,000 students at Kirkwood College. Not to mention Cedar Rapids itself is one of the largest cities in Iowa.

Tenant turnover is supposedly 13-15 months. Both units are currently occupied and have been for 6 months, leases are month-to-month. The owner says the only thing that needs replacing soon are the gutters. I will be seeing the property for the first time on Saturday.

Owner says he is selling this property to get some debt off his books. He wants to venture more into flipping properties than rental properties because he is a handy-man.

Value play deals are my focus for my investments, but I am not sure this is a total value play deal. I could add some coin operated washer and dryers for free off craigslist in the basement (if they are not already there), and maybe raise rents after some cost effective updating when new tenants move in.

That being said, it is the only deal I can get as a full time student without a full time job and tight credit markets.

I will be mindful in my due diligence and I am bringing with an HVAC friend to check the house out, as well as a friend who owns 30 units in Cedar Rapids and is good with rehabs. Luckily I am not alone, so I feel protected looking into this building. I realize that I need to be careful to make sure that the mortgage is not an adjustable rate mortgage, as the place was purchased in 2007 according to the seller. BofA is the lender.

The game plan is to assume this loan, hold the property for the next year or two while making cost effective updates (simple exterior paint, cleaning, simple curb appeal, etc) and gaining equity. I will sell the property around graduation time from college (May 2012) and move into purchasing a 15+ unit building with proceeds from this deal, my mobile home deal, and my new job salary. I think I can learn a lot about management on this starter property, even if it doesn't post 150% gains and isn't the most historic deal of my career haha.

What do all of you here at the Fastlane think? Normally, I would just go out and do the deal, but a multi-unit building is a little more daunting than a mobile home deal. I realize there are many more potential risks, and I am no seasoned veteran, just a mobile home dealing, apartment book reading college student.

Has anyone here ever dealt with a loan assumption? My friend who owns the 30 units in Cedar Rapids said I will need a good lawyer here, luckily he is a lawyer with experience in property law, so I am asking him to take on the legal work.

Thanks all, hopefully I can share my next investment story with you soon,

G. Alexander

 

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[G_Alexander]

Well, I know no one here had anything to add into property analysis, but I figured I'd give you an update anyways.

I decided not to get this property after talking with two very intelligent friends of mine. It's easy to get excited, and even more excited upon running numbers and seeing black...but you must stay conservative in your analysis or you will get crushed, thanks Mike and Mike (not ESPN) for reminding me of this.

(CONSERVATIVE NUMBERS)

Gross Rent = $875
Vacancy (10%) = -$88
Bad Debt = 1 late payment in the last 24 months, $50 charged.
Net Rent = $790

Expenses:
Maintenance (20%) = -$175 (old building, built in 1916)
Management (10%) = -$88 (travel to an from Cedar rapids, etc)
Advertising = -$10
Utilities = -$60 (water and garbage)
Total = -$333

PITI = -$645

Cash Flow = -$145

It would appear the property is running super thin margins, and could be in a negative cashflow situation. There are other factors that made me shy away from the property as well, but I am looking at two different ones on my campus in Iowa City now. I don't think loan assumption is all its cracked up to be either, and I am going back to my seller finance search.

If I don't find something by September I will be doing another mobile home deal (or two more at once) and will post both those deals up.

Best,

G. Alexander

 

[veli]

I dont have experience with property in the US so I cant offer you any advice, but I like reading threads like this, even if this deal didnt come through. Thanx for writing

 

[NoMoneyDown]

$333 per month in expenses (excluding PITI) on a $85k duplex? Wow - that is conservative.

Maybe set up a separate LLC to handle management?

Are you sure about the 20% in maintenance? That's like a new HVAC unit every year. Seems awfully high.

Don't forget to discount tax write-offs. Many people discard this in their financials, but some really good deals can be lost this way, IMHO.

It's good to be conservative, but not TOO conservative.

 

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[G_Alexander]

$333 per month in expenses (excluding PITI) on a $85k duplex? Wow - that is conservative.

Maybe set up a separate LLC to handle management?

Are you sure about the 20% in maintenance? That's like a new HVAC unit every year. Seems awfully high.

Don't forget to discount tax write-offs. Many people discard this in their financials, but some really good deals can be lost this way, IMHO.

It's good to be conservative, but not TOO conservative.

The maintenance calculation would be spread monthly in valuation, but say for instance...gutters, which the place needs; they would be around $1000. That's $100 a month for the first ten months. Then a stove goes...or something else.

Not saying that things would keep breaking, but even lowering the percentages substantially, the property is still running thin margins. I don't expect all properties to have 30% safety nets (completely unrealistic haha), but I would at least like a little more breathing room, and a situation where my name is at least on lien the day I put my cash down!

G. Alexander

 

[throttleforward]

Just out of curiosity, what are the "ok", "good", and "pants on fire awesome" thresholds for margins? When I was talking to a realitor friend of mine about investment properties and cashflow, he seemed to indicate that making around $200/mo/SFH (I have no idea what percentage $200 represented) was about the best he had seen after all factors were considered (in terms of renting out a small condo/SFH, factoring in vacancy, maintenance, etc).