Am I missing something?

Question

I’ve been analyzing deals and everything in my area seems to have such a low profit per door once I factor all the expenses and the mortgage and I feel like I could potentially be more conservative but dont want to talk myself out of every deal and never do one. I know the best way to get better deals is off market but just starting out I’m Leary of a few things to go that route so like the idea of a realtor and mls initially. I plan to self manage the properties initially until I get enough and it makes more sense to hire it out. I have all the ability to fix things on my own so not too concerned about that side of things.

I think I may have found a potential deal and would appreciate any and all feedback. Here are the numbers.

Duplex 3/2 and 3/1

Asking $349,900

20% down $69,980

Gross Rents 3600 2@$1800

P/I at 4.5% $1418

Taxes $385

Insurance $150

CapEx 10%  $360

Management 10%  $360

Vacancy 7%  $252

R/M 7%  $252

Total expenses $3177

Net profit $432

43200- 17500 mortgage= 25700/69980 = 36% COC return

What am I missing? I feel I’m being conservative cause I don’t want to lose but am I really?

Frank Jiang · Answer

Once you own the property, at some point, you become the seller.  You have to calculate the fees to exit in your analysis as well.

Jeremy Clark · Answer

@Frank Jiang

Thank you for the feedback.

I did miss the closing costs but I shouldn’t be responsible for realtor commissions as the buyer? Unless I’m missing something else. When I’ve bought my primary residences the seller was responsible for those. Is there something different when it’s not my primary residence?

Jeremy Clark · Answer

@Adam Apalategui

It won’t be owner occupied but these are the numbers my broker gave me.

Adam Apalategui · Answer

@Jeremy Clark

Loan terms seem like an owner occ vs. a non owner occupied rate?

Sean Sloop · Answer

Hi Jeremy, return is definitely up to you. Since I am in a different market than you I mayexpect different numbers! I think Someone else mentioned the debt paydown which would help towards your ROI. Not to mention tax advantages. This might be the right deal for you, but not someone else. Best of luck!

Sean

Frank Jiang · Answer

Because every year you own the property, your equity in it increases by roughly 5K.  When you one day sell the property, you will get all of that principal back in one big cash payment.  So in essence, the principal portion of your payment doesn't count as a true expense because, barring a downturn or excessive exchange fees, you get it back when you sell the property.  Only the interest piece counts as an expense.

There's a ton of other small but not inconsequential stuff you're missing, primary exchange fees (loan origination, realtor commissions, title, etc).  With all this in mind, you can feel pretty decent about this property returning somewhere between high single digit to low teens barring anything extraordinary (market downturn, unforeseen capex, difficult eviction, etc).

Cassi Justiz · Answer

Are you sure your rental comps are solid? That would theoretically be the biggest unknown in this scenario.

If your rental comps are solid and your taxes and insurance numbers are correct then it doesn't look like a bad deal on paper. (If that cash flow meets your criteria.)

Also, are tenants responsible for all of their own utilities, lawn care, snow removal, etc or do you need to factor in any of those expenses?

Jeremy Clark · Answer

@Cassi Justiz

Also everything is so expensive in my area. I don’t know what an actual really good profit should be per door.  I asked in a different forum about my calculations if I was too low but got no responses.

Jeremy Clark · Answer

@Sean Sloop.

Thank you for the clarification. That makes more sense. I think I misread it some where else on how I was to calculate it. Is 7-8% still ok? I’m in this for more long term but also don’t want to break even or lose money every month.

Jeremy Clark · Answer

@Frank Jiang

I knew I was missing something on the COC return. That’s makes more sense.

What do you mean by add the 5k principal back in?