Newbie: Am I crazy or is this a good deal?

Question

I want to start off by saying I'm a newbie in real estate investing. The past few monthsI've been listening to podcasts, reading books, and evaluating properties by working with couple of real estate agents in my area along with going to go see a few of them in person as well. I think I may be in analysis paralysis, so my first post on here is my attempt to get out of that ;)

So the thing at hand. I'm looking at a property in the Cincinnati area and it's a duplex. Based on the numbers and assuming I accept the purchase price without any negotiation and using the current property taxes and Insurance numbers:

- Cash on Cash: 9.5%

- Ann. Return: 18.4% in 5 yrs

- Cap Rate: 7.3%

Now again these numbers are on complete purchase price, so I'm assuming I can't get this lower. To me, these look like good numbers as BP Brandon mentioned anything above 8% is good CoC for rentals. I also went out and checked the property and the biggest costs I see is roof (hasn't been changed since at least 2015), one of the two AC units. My biggest concern is these costs and the current real estate market! Am I seeing this as a good deal when it isn't? And is the price probably very inflated for the current market and/or should I wait buying anything right now? The home is also 1948 build, so is that a concern as well for equity and future home? What about property taxes if I'm buying this home overpriced?

Sorry for so many questions...appreciate any help :)

Jaron Walling · Answer

@Dhwani Shah You should probably break down the calculation and list out the expenses you factored. That's a great return in 2021 if you ran the number correctly!

A roof replaced in 2015 is NOT old at all. I'd be very concerned about the HVAC, plumbing, outdated electrical, or old windows. You can get away with the old stuff for years but if you plan to remodel a unit get ready for surprises and a big renovation budget. That's probably why this deal feels to good to be true. If the mechanicals are near the end of it's useful life be ready to negotiate a lower price or have cash reserves day 1. The best deals DON'T need everything replaced, gutted to the studs, or massive amounts of rehab.

You're not paying property taxes if it's always rented. Taxes will go up but so does the rent level.

Jaron Walling · Answer

@Dhwani Shah Hopefully this is an off market deal because if it was listed it could be sold before we could even finish this discussion online. hahaha

If negotiation can lower the asking price (a little), rents have potential to rise, and deferred maintenance is low it's a home run deal. Good luck man.

Dhwani Shah · Answer

@Jaron Walling Thanks for the response. Here is how I'm looking at the expenses (in $ and %) and getting the above numbers:

I've kept a certain percentage for repair/maint along with Capital Exp. I don't plan on doing any major renovations, but I do understand your point that things can come out of the blue. Also, the roof id at least old as 2015. The agent doesn't know for sure, but the current owner hasn't changed it who owns this since 2015.

And what do you mean by not paying property taxes? I thought that was the owners responsibility, no?

Dhwani Shah · Answer

@Jaron Walling Purchase price is $167k and $1650/month rent coming in total (Unit 1: $900 and Unit 2: $750). Everything is tenant paid except a common shared lights and stuff ($50/month max).

And ohh I see what you're saying on taxes. And yeah, $300 cashflow/month according to the numbers there. I guess then this is good? I'm also concerned about the crazy sellers market...don't want to fall into that trap

Adam Holbrook · Answer

A couple more things to consider on property taxes. Double check them and figure on them going up especially if the purchase price is significantly more than the current appraised tax value.  Also if it’s owner occupied they’re usually a little less than if they’re not, so see how it’s currently listed compared to how it will be if you buy it.

I’m not familiar with the ($470) 2.5% lease up fee. My PM charges a full month rent plus 8% a month, so if you don’t already have a PM start trying to find one if you’ll be using one. Check their fees they may be negotiable.   If you are inheriting tenants you shouldn’t have to pay that signing fee portion IMO.

Will the tenants be mowing the yard etc? Utilities are on separate meters they pay all utilities plus their trash etc

Best of luck

Adam

Jaron Walling · Answer

@Dhwani Shah Let's step backwards. $1650 per month at market rate? What's the asking price for the property?

Yes you pay taxes. If this is a buy and hold investment that expense should be covered by the cash-flow. Honestly nothing should come out of pocket in Cincinnati. I'm not holding it long term if it costs you money. If it cash-flows $300 per month that's amazing.

Conn G. · Answer

@Dhwani Shah Listing out the expenses & income would be helpful, like @Jaron Walling stated. Taxes in the Cinti area are pretty high compared to other counties/states. I always evaluate the property taxes to be assessed as the purchase price value. Hamilton County has a tool to calculate this but a quick tool is using a ratio between current assessment and new assessment (Current Taxes/New Taxes = Current Value of Property/New Value of Property)

Newbie: Am I crazy or is this a good deal?

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