Duplex first property

[Richard Lindsey]

hey guys I live in Branson Missouri and I'm buying my first investment property. I already own my home so this will be a 20% down conventional loan. The numbers on it our 

64,999 purchase 1200 a year insurance 650 year tax so total monthly overhead is 550 with mortgage. Both sides are rented for 500 each after running numbers cash on cash return is 29% it looks like a no brainer as long as long inspection goes through. Its remodeled and turn key.Am I missing something or should I buy this asap ?

[Kevin Siedlecki]

@Richard Lindsey - Tap the breaks for a minute! Two things to reconsider: 

1. You will probably have to put 25% down for an investment property, even with a conventional residential loan, if you don't live in a unit.

2. You left off maintenance, CapEx, and vacancy, which are estimates, but important to include, because eventually they do happen.

Here's the way I would break it down

Gross Rent= $1000

P+I = $232

Tax = $54

Insurance = $100

Management (10%) = $100

So your actual cash flow in rented months is $514/month. But that's not what it's going to actually be. You will have some vacancy, so you want to price that in as well. A good conservative estimate would be 10%, so there's another $100 you need to budget for.

CapEx and maintenance are tricky. People often try to estimate based on the rent or the value of the home, but in reality, these expenses are often not dependent on either. You'll pay pretty much the same price for furnace whether its going into a house that rents for $1000/mo or $5,000/mo. You'll have to pay to have the snow shoveled off the stairs, or plow the driveway, and that cost won't vary significantly from your $65k house to a much more expensive house in a nicer part of town. Same when the plumber has to come unclog a drain.

Since they are guesses, though, let's use percentages most people do: 15% for CapEx and 10% for maintenance. That takes another $250 away from your cashflow. So your final number, conservatively (although the CapEx and maintenance numbers might be low bc they are based on a percentage), is $164/mo, for a COC ROI of 12% on your downpayment of $16,250.

That's ignoring closing costs and other expenses to get it to market. Let's say $3000 in closing costs (which would be low in my market, and $2000 in little fix ups to get it rented, and now you're in for $21,000, bringing your COC ROI down to 9%. That's not bad, but it's not a 29% no-brainer.

I'd still say go for it if you like that 9% number. You might get higher returns some years, but 9% should be pretty accurate in the long run. Hope this helps!