Home Buying in Philadelphia>Question Details

John Poole, Other/Just Looking in Philadelphia, PA

I have the opportunity to buy a three unit rental property for $425k that pulls in $3200 per month of income.

Asked by John Poole, Philadelphia, PA Sun Mar 29, 2009

Is this a good deal?

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9
Capitalzation rate is the Net Operating Income divided by the Sales price. So I'm calculating net op income as follows:

Rentals: $3200/month = $38,400
Real Estate Taxes =
Common utilities =
Assumed vacancy =
Maintenence =
Total ROI = $27,200

$27,200 / $425k (sale price) = 6.4%

Is this good?
0 votes Thank Flag Link Wed Apr 1, 2009
John,

Lets assume that Jeffersons expenses are right. The cap rate on that would make it 6.6

Id pass. Not good enough for me to consider an investment. You can easily get over 9-10 in todays market.

If you have any questions with cap rates, investments etc. feel free to email me at sean.dawes@longandfoster.com

I talk to investors about income properties from tiny properties under 100k to stuff over $21million.

-Sean Dawes
Web Reference: http://blog.seandawes.com
0 votes Thank Flag Link Mon Mar 30, 2009
Well actually I have a co-signer that would enable me to get a mortgage of course the risk of the property would be mine.

The suburbs are nice, but it's tough to get a revenue producing property out there. The city is where the money is - plus I like it.
0 votes Thank Flag Link Mon Mar 30, 2009
Hi John,

Sorry to hear about the job front. With that situation, buying a house is academic - you need a job to get a mortgage.

I would recommend that you consider using this as a time to make some sweeping changes that can have long-term benefits. If you move out of Philly and do NOT work in Philly, then you avoid the 4% city income tax. You'll still have 3.03% state tax but that's reasonable (this is 6.37 in NJ for most people!).

So ... I'd recommend that you consider finding work North of Philly in Lower Bucks, and when your lease runs out, move to a town up there without the 1% earned income tax (like Trevose, Bristol Borough, etc).
0 votes Thank Flag Link Mon Mar 30, 2009
Suppose I put 20% down (which I can't) then the numbers look much more attractive, but wouldn't it be a smarter move to borrow money at 5% rather than put the full amount down?

The renters pay $1000 each and a two car garage is renting for $200 per month.

The other little kicker is that I got laid off recently and I will need to find a job in the area if I buy the house. I have about $30k saved (after putting 5% down) as well as getting $1800 a month from unemployement. Wheww. Any that's the whole situation.
0 votes Thank Flag Link Mon Mar 30, 2009
Hi John,

With 5% down, that changes the figures radically. It might look like this (again - assuming really good credit and therefore rates). I'm also taking your tax figure and rounding it up:

$2450 - mortgage
$350 - taxes
$300 - PMI
$150 - insurance
$50 - water and sewer

So now your costs are about 3300 each month (not counting car payment, electric, etc). It's lucky for you that the renters pay their own heat. I'd confirm that though to be sure.

Oh yeah - and you'll be paying Philly City Income Tax since you live there (but this is also the case if you work in Philly and live elsewhere).

It doesn't sound like such a great deal. How much do those renters pay now? I'm guessing no more than $1000. So your costs are $1300. As Andrew brought up, there are likely huge hidden costs right now that you aren't aware of. And yeah - what if you lose a tenant? What can you get someone to pay in this market and how many months will it take to find them?

If you had the 20% down, this model is much more attractive. There are also tax considerations that we won't discuss here - depreciation and such.

Those numbers are too liberal for my taste.
0 votes Thank Flag Link Mon Mar 30, 2009
Thanks for the tips. There are leases in place for about a year and apts in the area are renting for about the same amount according to craigslist. I'm actually only putting 5% down on the place so I'm going to have to pay PMI of about $300 per month. However I am going to live in one unit and the taxes are only about $330 a month for now.

So monthy costs will be about $3000 (heat is paid by the tenants).
0 votes Thank Flag Link Mon Mar 30, 2009
John,

There are many reasons to by investement properties, are you solely looking for the cash flow or are you looking for tax benefits of the investment property. Without knowing this it is tough to say whether or not it is a good deal. Have you reviewed leases that show the rental amount and when these leases end. If you purchase this property and the leases end soon thereafter, will it be a problem for you finding new tenants. $3200 a month on this property looks good on the surface and while Jefferson here lays out some solid numbers for you he fails to take into account vacancy rates and any cash reserves you would need for any repairs to the property that might need to be made over the course of the lease. Is it desirable place to live for you? You would obviously lose the rental amount from the unit you are living in but the other two units could be helping to foot the mortgage bill month to month for you and you will be right there keeping a watchful eye over your new property.

I would be happy to help you run more concrete numbers for the purchase, let me know if i can be of any assistance.

Andrew Himes, CRS, e-PRO, ABR
267.231.8255
Web Reference: http://www.AndrewHimes.com
0 votes Thank Flag Link Mon Mar 30, 2009
Hi John,

On the surface it looks promising. Let's review some possible numbers. Say you finance 80% - that's 340,000. So, you'll need about $95K in cash to do this.

So your monthly costs might look something like this, if you have good credit:

$1835 - mortgage
$600 - taxes
$150 - insurance
$250 - heat (assuming central heat instead of per-unit)
$50 - water and sewer

Ok so about $2885 per month are your expenses. If you live in one of the units, then the model might be much more attractive for you - say if 2 of the renters pay for your mortgage (or close to it).
0 votes Thank Flag Link Sun Mar 29, 2009
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