If Ramsey and Kiyosaki had a child...would he buy this duplex?

Question

I first came to BP about 3 months ago and have become an ADDICT.  Forums, blogs, podcasts...I can't get enough!  My wife calls BP my "other" wife.

I have three duplexes under contract that I'm very excited about.  The first one just got inspected and I'm waiting on an appraisal.  I was hoping to get some perspective from the more seasoned guys on my deal.  I'm buying in an LLC since I have a partner.  The property was remodeled down to the studs 9 years ago.  Inspector said it's one of the nicest duplexes that he's inspected in the last several years.  A couple little things that we'll need to fix, but nothing that we're even going to ask for from the sellers.

I'm 35, with a solid income stream, so I'm using 15-year amortizations on all the properties.  I can keep adding in my own cash flow to continue buying, and I want the properties to be paid off when I'm 50-55.

Here's the nuts and bolts:

Purchase Price -- $144K (Sellers paying closing)

10% Down Payment -- $14.5K (4.5% 5-year fixed, 15-year amortization)

Rent -- $1650/mo. (both units currently rented by very nice people who live very close to work and really like the place)

Mortgage -- ($991/mo.)

5% Vacancy -- ($80/mo.)

Actual Property Taxes -- ($240/mo.)

Actual Landlord Insurance -- ($60/mo.)

4% Property Management -- ($66/mo.)  (Actual %, friend is a realtor/manager, gives me a great rate on properties I buy through him if they're in a good area)

10% Maintenance/Repairs -- ($165/mo.)

NOI -- $12.4K

Cash Flow -- ~$40/mo.

COC -- 3.5%

Cap Rate -- 8.6%

Total ROI (Including Principal Paydown) -- 45% in first year (goes up in subsequent years with additional principal pay down)

I think I did well for a first buy.  Agree/disagree?  Only thing I think I may not be adequately budgeting for is maintenance/repairs?  Would love some feedback from some experienced investors!  Thank you!

Richard C. · Answer

If Ramsey and Kiyosaki had a child, that child would be unable to read a P&S. But probably able to scam someone into buying the duplex for him.

Andrew Meyer · Answer

Cash flow seems a little low, but your using a 15 year and I am guessing this is in an A neighborhood? If so you should be getting at least some appreciation as well, but both of those are hurting the cash flow. Also, what is the beds/baths and sq ft? That helps us know what the maintenance would be. Although if it was really renovated 9 years ago, that it might not be too far off. I'm guessing about 2k sq ft, and between the 1% rule of price and $1 sq ft, lets say $1750/year, so $145 month would be my lowest end without seeing the house.

Would you be able to sustain this if you went into negative cash flow? Say Insurance or taxes went up 20% both in the same year and now your $-100/200 cash flow? This would be my main concern, specially with using the 15 year loan. What APR do you save going from 30 year to 15 year? It would make about $350 more cash low, taking you to about $400 or 200/door which is a pretty good number.

Steve Vaughan · Answer

Hey @Andrew Banker! Love the title. Doubt a Ramsey kid would be named Banker though, Lol.

I like the hybrid of the 15-yr am as well.  I pay 'em off and quit playing.  Maximize returns can be exhausting.

Numbers look pretty good for a nicer property -congrats!

Frank Eimiller · Answer

Sounds like you got a pretty solid deal, others seem to be agreeing as well!

Andrew Banker · Answer

@Andrew Meyer, thanks for your thoughts.  Two 2/1 units, 1922 total square feet.  So it appears that I meet your metric.  I could sustain all three of the duplexes that I have accepted contracts on, even if they went totally vacant permanently.  At some point, I won't be able to say that for my entire portfolio, but at this point, negative cash flow is not a concern for me.  In my total ROI number, I add the principal pay down back in, which helps me get a figure closer to what the COC would look like on a 30-year amortization.  Being that we're working out of an LLC, I have to go commercial for the lending.  Being that the rates are only fixed for 5 years (and rates are going to go up at some point), I don't want to keep cash flow at the expense of reducing the debt to some degree.

It seems to me that debt pay down and taking cashflow roughly balance each other out in total return.  For people that might not have the same ability to continue to bring capital to the table, the cash flow method would be much more beneficial.  For me, shooting for everything being free and clear in 15, while continuing to buy with my non-RE income stream, seems to be a better plan.  In my inexperience, am I missing anything on that front?

Thanks for your thoughts!

Steve Vaughan · Answer

Your welcome @Andrew Banker.  I normally scrutinize the COC much more and do hope this is at least kind of a value play, but much room was given considering it will be a paid off asset in a dozen or so years and you currently have a good w-2 job!

Andrew Banker · Answer

That made me laugh @Richard C.!

Thanks, @Steve Vaughan.  I've read a ton of your posts over the last three months, so I appreciate your feedback on the numbers.  Builds the confidence!  Thank you!

If Ramsey and Kiyosaki had a child...would he buy this duplex?

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