Newbie investor, Am I doing this right?

Question

Hi guys, first time posting here. My brother and I are looking into buying duplexes in the suburbs around Philadelphia and New Jersey since that is where we grew up and currently live. I found a few duplexes that I feel I've ran the numbers including maintenance, vacancy etc and these properties should generate ~$200-300 cash flow a month once fully rented out. We plan on getting a few properties and generate the cash flow and leave it until we have enough for another property. We'll be putting 15% down and using a conventional loan at 30yrs fixed.

I found these through real estate agents and looking online. I feel like I'm missing something though, these properties have been sitting online for months according to the websites. Can anybody give me an idea on something I may be missing or over looking as these seem maybe a little too good to be true? I appreciate the input guys.

Andrew Johnson · Answer

@David Vile I think your numbers are coming up nice because you’re using 5% instead of 8% for vacancy. 5% instead of 10% for cap-ex. So while your rents are conservative your expenses are conservative as well. Now that might be logical if you’re buying 2015 construction but not so much if it was built in the 1960s. I’m assuming property taxes and in there somewhere but I didn’t see them. Anyway, the net result is that you might be “shading” the expenses slightly slow. It happens all of the time. But if you change everything from 5% to 8% it will add up.My suggestion is to stress test your deals but running multiple pro-formats with 5% categories vs. 8% vs. 10%. At least know where that “breaking point” is in your analysis.

David Vile · Answer

Yeah, I looked at the property without my brother. I called him and talked to him, he mentioned the plumbing too (he thought of it as he’s the HVAC technician) I didn’t even think of it. I think i need to do more research before I pull the trigger on anything. I may be trying to dive head first into this too quickly. That’s some good information to think about though.

Andrew Johnson · Answer

@David Vile It's always tricky and fun to try to figure out why a property has been sitting at a seemingly fair (or lean) price. Odds are there's a reason. A good reason. It's just a matter of finding out what that reason is. I wouldn't worry about a hot water heater, those are (relatively) cheap fixes. It's the HVAC that will get you. When you start doing repairs you're talking $1K+ if it's more than just a routine service/cleaning/charging. In a 90 year old house I'd be really concerned about the plumbing, potential for galvanized pipes, etc. That's a huge expense if things are going sideways on that end of things. And roofs are always a little bit hit-and-miss. A "new roof" is great and will last 20+ years but there are plenty of people that just take shortcuts and put a new layer of asphalt shingles on top of the old ones to save time and money. So you just have to know what you're actually getting when someone says "new roof" or "roof that's 8 years old".

Lana Lee · Answer

You mentioned that it was sitting on the market for a long time. In my experience, good multifamily is gone in a couple of days days if not hours. How close were you watching the property. Did it go pending and back on the market in some point ? Did you check the zoning? Is it a legal duplex?

David Vile · Answer

It is a legal duplex. I didn’t notice it pending at all. Pretty much just sitting for sale the whole time I’ve been looking for a property, which is about a month.

David Vile · Answer

That's a good point. The house I'm looking at is 90 years old. I did get a chance to speak with the owner and he said the roof if 8 years old and the hot water heater is about 10 years old. Other than that the property looked like it was in great shape for being so old. I'll run different numbers and see how it still holds up. Property taxes and mortgage are in there. I appreciate the feedback.

David Vile · Answer

For expenses I ran - Vacancy 5%, Capex 5%, Garbage 5%, Repairs 5%, Water & sewer $80 monthly, Insurance $80 monthly.I used conservative rents for the area, for the 1 BR I used $800 a month; I believe we could realistically get $850-950 for the 1BR, and the 2 BR I used $950; but other 2BR's in the area are going for 1300-1400. With the conservative rents I'm looking at an income of $1750 with a monthly cashflow of $303. 64. Cash on Cash ROI is 14.01%. I tried to drop the PDF file in this reply. Can I not share files on here?

David Vile · Answer

delete

Andrew Johnson · Answer

David Vile Run your numbers in the BP deal analyzer and post the results. It’s hard to know what you might be missing if you’re not denoting the categories, values used, etc.