It can't be this easy. I must be missing something?

Question

Found a duplex in a decent neighborhood renting for $600 and $550, respectively with a sale price of only $79,000.

Even accounting for 25% of rent going to Property Management, CapEx, Repairs, Vacancy etc, my calculations still see a HUGE cash flow ROI.

After mortgage, property insurance and taxes, looking at a $400 monthly cash flow.

My question is this: I'm assuming I use a Property Management group to deal with setting up tenants (which is 8% of my 25% expenses I mentioned earlier) then where is the risk? They even guarantee rent and to have a tenant! Why isn't everyone just gobbling up these properties, having someone else take care of it and enjoying a $400 monthly cash flow after all your expenses? What am I missing?

Jason D. · Answer

@Andrew M Bickett because your expenses are not accurate.1) 8% is their monthly management fee, but they also charge a placement fee, which is likely, at least, one month's rent. So I would make the 8%, 15%.2) Maintenance and capex will be closer to 20% - 25%, because the rents are so low. Maintenance is not a percentage of rent, but actual dollars, so the lower the rent, the higher the "percentage of rent".I would rerun your numbers using 50% for expenses, plus Mortgage, and then see what your cashflow is.

Brian G. · Answer

@Keith J. You need to run exact numbers as much as possible, however there is a "rule of thumb" which states that on average your total expenses (pm, vacancy, maintenance/repairs, Capex, taxes & insurance) will run 50% of your total rents not including your P/I payment on your mortgage. Take 50% of your rent then minus your Principal/Interest payment from your mortgage (ie do not include taxes and insurance). It's very difficult to get low rent properties to truly cash-flow over time. Eventually those big expenses come (ie roof, hvac, etc) and can wipe out several years of your cash-flow. Again run all the numbers and like @Jason D. said don't forget to include your turnover cost (ie how much it costs to get the unit rent ready when a tenant vacates and how much a pm will charge you to place a tenant). A competent pm will tell you exactly what their average cost is to "turn a unit".

Andrew M Bickett · Answer

Thanks team.I believe you were right; while some expenses are percentages, my error was believing all these expenses stayed static regardless of the rent each month. What is a good rule of thumb for calculating expected expenses each month? Originally I was thinking: Vacancy = 5%CapEx = 5%Maintenance = 5%Property Management = 8%Lease placement fees - 2.5%Thus my overall monthly expenses, I wrongly thought were ~25%. What is more realistic in each category to have expenses closer to ~50%?

Ed Matson · Answer

I agree with Jason and Sam, rough estimate of 50% op ex is closer to the mark, especially if the property is to be professionally managed. Very roughly, I use the following estimates, depending on the property, its condition, and the caliber of tenant.Vacancy 5%Repairs and Maintenance 10%CapEx 5%Insurance at actual cost - in m y area it would be about $1600/yearTaxes at actual costAny legal expenses for setting up an LLC? Tax prep costs ?

Sam Grooms · Answer

25% operating expenses seems low. Especially on such low rents.

Jay Hinrichs · Answer

on low end rentals which those are based on rents.. 50 to 60% operating costs before mortgage is were these flush out after a 5 year run 90% of the time.

Connor Mckelvey · Answer

Brand new investor here, so these thoughts are from books, not real-world experience.You may want to ask yourself if you really want a duplex, or if you just want an ~$80,000 property.Could you buy an SFH/townhome for $79,000 that would rent for $950-1100 (or more) per month instead? Even though having multiple units can help balance out a vacancy, would you rather have 2 lower-income tenants or 1 higher income tenant? This could mean half as many complaints, half as many late rent checks, and half as many broken toilets and garbage disposals, etc. With a SFH/townhome, you might even attract tenants with families/kids who might stay 2X longer than those tenants who are attracted to a low-rent duplex. This saves on placement fees with your property manager and holding costs due to a vacancy. But it obviously depends on your market. Just some food for thought! Good luck!

Steve Vaughan · Answer

Rents below $700 are exponentially more difficult to deal with than $800 or $1000 . You're dealing with a $1700-$2100 monthly income tenant most likely. One hiccup to one paycheck puts you at risk of slow or no pays plus higher prob of damage and drama.Normal %s for vacancy, repairs, cap ex don't work at this price point. $6000 for a roof is like 10%. A new fridge is approaching 8% of one unit's annual gross. I'd guess op expenses with a PM at 60%. Cap ex another 15 depending on age and condition. Cf is whatever you can squeeze out of the 25% remaining minus debt service. When you go to sell, you are your buyer. An investor looking for a bargain. But will be good learning experience. One big seminar. My $.02.

Jim Chuong · Answer

@Andrew M Bickett even though you’re underestimating your expenses, if the neighbourhood is good, it’s not a bad deal IMO

Anthony Wick · Answer

@Andrew M BickettExpenses completely depends on what you’re actually buying. At $79k I would be guessing that it needs quite a bit of work/deferred maintenance. Now, I can get away with 5% maintenance and 5% capex on a couple of my properties, because the roof and Hvac’s are fairly new. Analyze the big expenses and how long of life they have left. Roof, Hvac, appliances, etc.