$40,000 to invest, advice please!

[AJ Felix]

Hi Bigger Pockets,

I am newbie investor looking to get started in the Baton Rouge, Louisiana region or Conroe Texas region. I have $40,000 to devote to investing and looking to make a start in multi-family 2-4 unit niche with a buy and hold strategy. While I am reading and continuing to learn I do not know what a good deal looks like. Can someone illustrate what a good or home run deal on a multi-family property looks like? Also, what would be a way you would best utilize the investment money if you were just starting out again in the mf niche? 

is this a realistic home run deal: Duplex cost $80,000, ARV $90,000, %25 down payment ($20,000), rehab costs $10,000, closing/other costs $5,000, Total all in costs $35,000, rent $150 per door x 2 =$300 monthly, $3,600/$35,000=10.3% ROI

[Evan Polaski]

@AJ Felix  I am guessing you mean $150 NET per door.  If that is true, then your numbers are pretty solid in today's market.  Some people won't accept $150/door as it could be too low in their eyes, others would be happy at $100/door net.

With a duplex-4plex, make sure you account for any lawn maintenance/snow removal and confirm who pays which utilities.  You can always bill back, as long as you are allowed to by law and let tenants know, even if it is single meter.  But you will need to then account for common areas, as you cannot typically legally bill back for that.  These are the two big differences I have in my duplex versus single family rentals.

Now onto the nuts and bolts.  You need to make sure your expenses and reserves are dialed in to really know that net number.  When I see people reserving $50 for capex and/or repairs, I always wonder how.  Take for instance a roof lasting 30 years, and costs $6000 for a full tear off.  That equates to $16.67/mo of reserves. If you only have 10 years left on your roof, that will be $50/mo reserve alone. A furnace has a 20 year useful life, and costs $4k that's another $16.67.  AC, about $10/mo based on what I have spent in the past (and prices keep going up), and the standard useful life.  Then add water heater, refrigerator, range, dishwasher, exterior paint every 10 years, exterior decks every 20 years, and all of a sudden you have over $100/mo for capex reserve items, if they are brand new.  There are countless items (I had to re flash, cap, tuckpoint and seal a vent chimney to the tune of $2500 to stop a water leak into a bathroom.  If that isn't accounted for, that is nearly a year of profits.

Repairs, I have never been able to turn a unit for under $500.  Thats $40/mo if you turn every year, and obviously steps down with 2-3 year tenants, but normally costs go up marginally the longer they have been in.

Additionally, if you are going to have a management company handle it, make sure you are accounting for management fee, typically 10%, and leasing commission 1/2-1 mo rent is typical.  Of course this is something you may plan on doing yourself, but should be accounted for in general, as a way to pay yourself.  You should be able to estimate your taxes from the county auditor or assessors office.  Make sure you calculate on your purchase price, not what the prior owner is paying.  And insurance you can get good estimates from your local broker pretty easily, again don't rely on what the seller is paying.

Best of luck.  It can be a very lucrative business if you go in knowing all the real expenses.  That is one area I didn't account for early on.