Calculation question... first timer

[Christina Tkacs]

I'm running some calculations on a duplex that I'm looking at, and things don't seem to be adding up.  This is my first real estate venture, so I want to pose the question to the community for advice.

The duplex is in SE Tacoma area and listed at $245,000.  We'll put $45,000 down so the loan is at $200,000.  Currently, total rental income is $1900.

Property taxes - $250/mo
Insurance - Guessed to be $200/mo (I have no idea on this one!)
Vacancy (10% of rental income) - $100/mo
Repairs (10% of rental income - $100/mo
CapEx (10% of rental income, duplex was built in 1968) - $100/mo
Utilities - I believe tenant pays all but I'm not sure... for duplexes here, owner usually pays for something.

That's $800/mo in expenditures.

A 15 year mortgage at 5% is $1581/mo.  Add in the expenditures = $2381/mo in expenses.

Subtract rent and that means cash flow is NEGATIVE $481/mo.

My question is... $245,000 is a reasonable price for the area.  $1000/mo in rent for each side is also very reasonable for the area.  Many great deals are taken before they even hit the market... I understand that... but how can such a reasonable duplex potentially put us nearly negative $500/mo?

I just feel like I'm missing something, or calculating something wrong.  The duplex currently has two offers beyond asking price, so I know I MUST be calculating something wrong.

Thanks  :)

[Patrick Britton]

@Christina Tkacs  couple of things i think are worth mentioning:

1.  everyone will arrive at different numbers depending on a whole range of assumptions.  For instance, you state a 10% vacancy rate, 10% in repairs and 10% in cap-ex.  So you basically have 20% in cap-ex since that's what repairs are for.  

2.  10% vacancy rate is extremely high.  Unnecessarily high IMHO.  You don't want to be so conservative you end up missing out on good deals.  Also, it is NOT an expense.  It is an amount you should dedicate to reserves.  big difference.

3.  insurance.  this listing (it's not hard to determine which one)  says $1,360 a year for insurance.  so $200/month is nearly twice the REAL number.  

4.  utilities:  this is the second greatest determinant of deal quality.  who pays what and how much?  they can change cap rate 3% points with ease.  it's is imperative you find out who pays for what and don't make any assumptions about who SHOULD pay for what.  duplex means owner pays for water?  hogwash!!  Also, you should note that it's a septic system.  

5.  if goal is cashflow, why not go 30 year mortgage?  

6.  take those rediculous 2% rule, 1% rule, 70% rule and write them on a piece of paper.  then burn that piece of paper and flush ashes down the toilet.  Those "rules" do not apply to most western states.  They apply to the midwest, rust and bible belt. 

In short, i think you are being too conservative with a lot of the numbers. Rent appears attractive and so long as utilities can be offset to tenants, i think you might have yourself a decent deal or at least, a deal i personally would be willing to do. Based on the pictures from the MLS (which were done professionally and probably maker the place look better than it is) it appears there isn't a whole lot in deferred maintenance.

One last thing I insist all buyers have is a lease review contingency, possibly in lieu of an inspection contingency.  LOL - most sellers use alternative facts and most agents can't do basic arithmetic, so having time to double and triple check the lease agreements, utility bills, rent roll etc., is just as, if not more important than a home inspection.  

good luck