First Duplex under Contract

[Devin Duval]

Hello everyone,

I am finally under contract for my first Duplex. It is $185,000 and I am putting 25% down since I already have a primary residence. I am also paying closing cost. No repairs are needed and tenants are in place. Property management is 9% of rent and one side rents for $850, and the other for $950. HOA is $30 a month, Taxes are $325, and Insurance is $80. Tenants pay water/sewer/yard maintenance/trash/electrical. So after putting $100 for vacancy and $150 for CapEx/Repairs, I will be looking at a $250 cash flow. I know this isn't the greatest deal, but it is in a great area and I really wanted to get started. When I calculate COCROI it doesn't seem to be the percentage the experts say you should shoot for so I am a little worried, but at the same time excited for the experience.

Would you consider this an okay/average deal or at least not a terrible deal? I appreciate any and all input! Thanks!

[Erik W.]

When I started investing in 2006, I didn't know words/phrases like Cash on Cash and ROI. I also didn't know real world numbers and percentages. It took awhile to learn them.

What I found out is what many call the "1% Rule" which states that to BREAK EVEN, a property rent for at least 1% per month of the total "all in" costs, regardless of whether they are paid cash out of pocket or borrowed.  So a $100,000 property would rent for $1000 a month, total.  Your property will rent for $1800 a month and total paid is probably around $190,000 once you add in your closing costs.   Close enough for now.

$150 / month for Maintenance/CapEx is low. I do 5% for CapEx and 10% for maintenance, and on this property that would be $270.

$250 / month ($3000 annual) cash flow on approximately $50,000 invested is 6%.  True, you will also get depreciation to reduce your tax bill on other earned income, and you will also get amortization (loan pay down) and possibly appreciation, but 6% is pretty meager.  I could whip that easily in the stock market over any given 5 year term, as the S&P 500 returns 10.7% average annualized rates since the early 1970s.  And stocks come overall with far fewer risks and complications.

Without knowing much about your market or you goals, it's tough to say if this is a "good" deal.  If you have money to invest and your real estate is appreciating at an average rate of 5% compounded, that plus your cash flow over the next 10 years should make this at least an okay, if not reasonably pleasant deal.  

Don't sweat it too much.  We learn a lot from our first deal and get better as time goes on.