Real Estate: Cash Flow and Sheriff Sales

[aceupthepants]

Hey guys I have been reading up on real estate and I was wondering about the pros/cons of buying a property strictly for the cash flow it produces. Take for example a particularly bad area around me where duplexes are selling for roughly 120k with each unit producing a rent of 700 totaling 1400 a month and 16800 a year. Now that seems like good cash flow but this is a bad area with a lot of drugs and other problems, so why does this seem like a good investment to me? I guess I am focused too much on the numbers and not looking at the whole picture, it just doesn’t seem to make sense to me.

Also I was wondering what the general thought on sheriff’s sales were? When a buddy explained it to me it seemed too good to be true. I noticed in the upcoming sheriff sale that a house in an area where homes sell for around 250k is going to be sold for 140k, why does this seem too good to be true?

[SossMan]

your next google should be property managers in the area.

[juschuma]

You need to look at the expenses. For example, let's assume you take out an 80% loan or $96k at a 7% constant. Your annual payments will be $6,700. Now, assume about $2k per year in real estate taxes, $5k per year in maintenance on the building, $1k per year in vacancy / rollover costs, $2k per year for insurance. Total expenses are now $16,700 with income at $16,800 for a total cash flow of $100 on an investment of $24k. That's a cash on cash return of less than 1%. Keep in mind you can get 5% in an ING savings account.

Now, these expense assumptions are just guesses. The exercise is to go through each one and prove out what the most likely # will be and see what your annual cash flow will be. You then need to compare it to the risk that you are taking.

[SossMan]

[ QUOTE ]
You need to look at the expenses. For example, let's assume you take out an 80% loan or $96k at a 7% constant. Your annual payments will be $6,700. Now, assume about $2k per year in real estate taxes, $5k per year in maintenance on the building, $1k per year in vacancy / rollover costs, $2k per year for insurance. Total expenses are now $16,700 with income at $16,800 for a total cash flow of $100 on an investment of $24k. That's a cash on cash return of less than 1%. Keep in mind you can get 5% in an ING savings account.

Now, these expense assumptions are just guesses. The exercise is to go through each one and prove out what the most likely # will be and see what your annual cash flow will be. You then need to compare it to the risk that you are taking.

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but the realtor told me it would appreciate at 20% a year...minimum. WTF? [img]/images/graemlins/tongue.gif[/img]

[aceupthepants]

[ QUOTE ]
your next google should be property managers in the area.

[/ QUOTE ]
Not exactly sure what you mean by that.

[ QUOTE ]
You need to look at the expenses. For example, let's assume you take out an 80% loan or $96k at a 7% constant. Your annual payments will be $6,700. Now, assume about $2k per year in real estate taxes, $5k per year in maintenance on the building, $1k per year in vacancy / rollover costs, $2k per year for insurance. Total expenses are now $16,700 with income at $16,800 for a total cash flow of $100 on an investment of $24k. That's a cash on cash return of less than 1%. Keep in mind you can get 5% in an ING savings account.

Now, these expense assumptions are just guesses. The exercise is to go through each one and prove out what the most likely # will be and see what your annual cash flow will be. You then need to compare it to the risk that you are taking.

[/ QUOTE ]

Are maintenance expenses typically this high? I guess I didn’t think expenses were this high; it seems very hard to turn a profit based on cash flow.

[juschuma]

[/ QUOTE ]

Are maintenance expenses typically this high? I guess I didn’t think expenses were this high; it seems very hard to turn a profit based on cash flow.

[/ QUOTE ]

I'm not saying that they are that high. Your job is to figure out what the correct numbers should be. Once you've validated all your assumptions, then you can make a good decision to buy or not buy this piece of property.

[Thremp]

Depends a lot on the age of the property. >10+ years old. When you buy a brand new home there is almost 0 cost to maintain it... Well assuming it isn't busted when you buy it.

[aceupthepants]

Does anyone have any input on sheriff sales?