What calc numbers and % do you consider a good deal?

Question

I bought a single family home to change it into a up down duplex and the numbers seemed to work out pretty good considering I live in Oregon and rents are hard to cashflow here.  I planned on just putting a door on the stairs to separate up and down and add a kitchen or kitchenette downstairs.  I could have done it for 20-30,000 and lots of sweat equity but then my friend told me I need to do everything legal for a duplex if I am gong to have two different households there  and scaring me with bad scenarios of not being insured if I didnt legally duplex it and had two households. I  think I over rehabbed it and ended up doing way more to make it legally a duplex, which meant I ended up spending twice as much and realized it raises taxes, insurance, had to put in asphalt driveway, etc that I wasnt really planning on doing when I got it.  Probably should have just done the door and kitchenette since it is just a blue collar neighborhood and nothing special. It was a great learning lesson and I know waaaay more than I did before, after making all of those mistakes.  Didnt have all this info from BP prior.  Just ran the calculator now and realized I am not really sure what are actual great numbers on some of the calcs. My house is in the Dalles OR.  Here are the numbers it gave me.  I know they are not fantastic but are they terrible?  I got it for a decent deal at the time of 223,000, I thought, and put 10% down.  Now will put 60,000 into the remodel so about 90,000 total cash out of pocket including the down with closing cost.  My cash on cash ROI is only about 6% and will cashflow only 450$ a month now with CAP around 7% I think.  I am not able to find similar places to compare the value it will be after I change it to duplex so I made super conservative of around what I have put into it so 290K$ since it will be worth a little more as a duplex as it did a house. Is this super terrible? Before I thought it would be cap above 10% and cashflow around 1100 with only 50k out of pocket.  What are your good numbers for all the items on the calculators that you go by? (cash on cash, ROIs, Cap rates, etc...)  I am gong into real estate for cashflow mostly but will buy hold or flip etc whatever works better.  I am sure I am not the only one who has learned the hard way but I wont make the same mistakes now while I am looking for my next property and just glad I have a little cash left to get me into another better deal next time.  Thank you for taking the time to look at the numbers.

Kenneth Garrett · Answer

@Tamara Reusse

There is a lot of information here.  Let me start by saying your friend is correct.  Changing a single family home to a duplex especially a stacked one is challenging.  There is a floor rating between units, electrical issues (where is the panel for the other unit) heating systems, plumbing shut offs etc, let alone zoning issues.  Yes insurance could be a problem on a claim without the proper permits, etc.

As far as the return, it’s pretty low in my estimation.if you put 90,000 of your own money in and it cash flows 450 a month that is about an 8.3% return (90,000/10,800). I like to get at a minimum of 10%.  I tend to BRRRR my projects and usually I can either can refi out all my money or within two years I have reimbursed myself.  Don't worry about CAP rates they don’t apply unless your at 5 units or more.

Take the project as a learning experience it could be way worse negative cash flow.

Good Luck on your next one.

Whitney Hutten · Answer

@Tamara Reusse First, good for you for getting a deal!  You are in the game, even if it's not yielding the returns you want.  Now... what lessons can you learn and carry forward into future projects.  Kenneth and David have already given feedback on that.  Here are my parameters I use, based on my goals of 1. cashflow NOW 2. at least 3% appreciation 3. and no more than $10K of my own capital left in a deal.

- CoC after all reserves set aside. I like turnkeys at 10% and BRRRRs at 15%+.  I also look at the asset class.  B-class - I'm comfortable at 10%, C-class - I want 15%+ to give me a cushion.  My portfolio is averaging 16.4%.

- Actual cash of a minimum of $150+ on a SFR and $100 on a multi.  You can have high COC and very little money in your pocket at the end of the month.  I want to ensure that if I had to lower rents, I'm not going upside down. My portfolio is averaging $247/door right now (which means you have to find great deals).

- DSCR 1.2 or above (ideally 1.25 or above).  Keeping this measure high means I can continue to get financing.  My portfolio is averaging 1.35.

- Capital left in the deal, $10K or less.  I will leave more depending on the deal size.  For me, a BRRRR isn't a failure if you have to leave a little in.  My portfolio average is ~6% of my own equity (meaning 14% is carried by the property itself).

- Return on equity of 9% or more.  This is the total return on all of your equity (downpayment, tenant paydown, and appreciation).  For me, when this number approaches 8%, I look to reposition.  You don't have to... but this will keep your velocity of money high.  If you buy turnkey, this means you are probably buying close to 10% already.

One thing not gauged by returns, that I always look at, is do I have multiple exits on this deal?  If all numbers are the same, I will go with the deal that I could potentially do more with (flip, investor-flip, lease option to the tenant, etc.).

Hope this helps!  PM with Qs.

Natalie Lopez · Answer

Great story you shared! I just did the same thing recently in Gresham, but Im actually doing a house hacking as well. So Im currently living in the bottom unit while I'm in the process of converting into a permitted Duplex. I'd love to hear more about your permitting experience :)

Nothing is terrible from your experience & its definitely brought you a ton of learning lessons! Glad you are pushing forward & wish you best on your future endeavours!

David Flores · Answer

@Tamara Reusse

I agree with Kenneth on a lot of what he said. Although, I would still keep the cap rate as consideration for a factor of how you rate different investments. 7% is honestly low for for a single family home.For a single family home I like to be around 10% just because you do not have as much protection. For example, you have 1 lease and that one lease could be vacant at times which means 0 revenue when its vacant as opposed to a multi-family or 5+ unit where 1 vacancy is not a big issue. All cap expenditures are also related to 1 lease which can be a huge hit compared to multis. But as Kenneth said you got involved which is key. Learn from the mistakes you made and continue investing in better deals! You are still cash flowing!

Susan Elliott · Answer

@Whitney Hutten

Always great to hear your numbers! I especially like the reminder on Return on Equity. Rarely do we think about this, but it seems like such an important concept to keep that velocity high once you are in the game for a while! You have certainly mastered some of these things and I always appreciate reading your insightful guidance.

@Tamara Reusse

We should chat! I have also transofrmed a SFH into two units in The Dalles. Small world! We aren't as far along as you as far as permitting, but I have been trying to do everything according to what the permits will require, as far as I understand them. I know it always feels like I might  be missing something. So great to see your numbers and hear your feedback here. I think we can probably help each other on this path! I'll send you a PM!

What calc numbers and % do you consider a good deal?

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