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For what you have described, even $110K sounds high to me. That is $55K per unit, with a $600/mo rent for that unit, or $7200 per year (with no vacancy factor).

You therefore have a gross rent multiplier of 7.63. GRM is a fairly crude way to quickly value a building; it is related to market capitalization (which is what your bank will use) but generally if you get much above about 6.5 in GRM you can count on negative cash flow for awhile. The only exceptions are if the building is immaculate and you can expect the capital budget to be near zero for a few years. Also, in some "hot" areas, GRMs may get as high as 10 - but if you buy that, you are buying a cash drain for a few years in the expectation of being able to raise rents gradually to make it pay, and with the expectation of substantial capital appreciation.

I might point out that "hot" areas periodically go bust and those who paid too much are left holding the bag.

This would be the highest selling price to date on that street, for a building that is in good condition but needs costly repairs.

Oxymoron. No building that needs costly repairs is in good condition.

With an investor loan of 90% LTV, I would be out of pocket $11000 + $3400 closing costs. The payment would be about $1000, so the rents would make this a positive cash flow of about $200/mo.

First, no bank will give you a 90% LTV unless (1) you intend to occupy half of it as your primary residence or (2) you cross-collateralize with something else (don't do that by the way - the complications can be painful. Trust me on this.) You should figure on 75% or less LTV from a conventional lender.

You might put together a first plus second (seller financing) arrangement to get to 90%, but if you do, some banks will kick you out and you will have to contend (probably) with a balloon on the second.


Second, that cash flow figure is only valid if you don't have to perform maintenance. In any given month, that might be true. But you said it yourself; roof, siding, air conditioners. Don't forget the occasional water heater, or the window that malfunctions.

Also, don't forget vacancies. One vacancy for one month in that building takes your plus 200 and makes it minus 400 - before maintenance.

It could be that the vacancy rate in the area is very low. But if so, why is the building empty now?


The seller rejected my offer with no counteroffer. I have a hard time understanding why. How can the property appraise for $130,000? A mortgage company won't lend more than the appraisal.


The value of a thing is the price that thing will bring. If he can get his price, fine.

But it looks to me like a colossally bad deal. I wouldn't go near it.


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