First Multi-Triplex number good or bad?

[Leah Robertson]

The wife and I are looking at buying our first Multi unit. We have two townhouses (different complexes) and a condo that we own and rent out but those were just our homes we used to live in and we kept them to rent them. This is the first purchase that we are buy purely as an investment. The property is a Triplex (2 x 2 BR, 1 x 1BR units) in a nice neighborhood with a new roof and some recent upgrades. Current rents are noticeably below market, for the 2 BRs $800 while identical unit across the street rents $1200 a month. After running four square numbers for a 310k purchase we show a 6.5% Cash on cash with very conservative rent of $2600 total and 2k for "rehab" (though we aren't planning any rehab) If we claim to get the neighbor's rent levels then its 14% Cash on Cash, this is just barely the 1% rule though. I feel like I'm missing something, why it the 1% rule seen as "the minimum" when I could get between 6.5% to 14% ROI?

Help me, what am I missing?

Cheers,

Mike and Leah

[Joe P.]

Theoretically, you could buy a houses at the .5% rule and 2% rule and not make any money with the latter. But its a good gauge to determine whether or not to look more closely at a property.

Lets take your 310k acquisition (assume 25% down, 5% closing) and conservative rent of $2600 as you described. This means your monthly debt service is $1127 (4.125%, 30 year, YMMV). Now set aside 40-50% of rent for all expenses -- CAPEX, maintenance, vacancy, management, utilities, city/licensing costs, et al), somewhere in the $1040 to $1300 range, and you still haven't factored in the taxes/insurance. One could argue the 40-50% setaside for expenses is high, and that could be, so you need to run an independent evaluation on the property to see what's needed.

Also, prepare for 5-10k of an "oh crap" budget for the first year. I bought a duplex that looked fine and even home inspection wise turned up nothing imminent, and then a bunch of imminent things happened. Best to be prepared and ready when it happens, or pleasantly surprised when it doesn't.