How to analyze a buy and hold property?

[Mahan Shahverdi]

I am interested in a duplex which has 2 tenants paying $775 a moths each. It is in a great location and $1700 is the tax amount. It need some updating but it is in good condition. 

How Can I analysis this deal? 

I tried to use Bigger Pockets tool but it was confusing for me. 

Thank you,

[Austin Tam]

You should decide on a goal first (i.e. cash flow vs. building wealth). The analysis is a lot easier if you're a cash flow investor. Looking at projected ROI numbers can be confusing because of the baked in speculation (appreciation and equity) and additional numbers you have to consider.

If you're a cash flow investor cash on cash return should be the number you focus on.  Things to consider:

Purchase Price

Check the comps in the area to see if you're getting a good price. If you can't find a similar property, you can see what other multi-units have sold for in the area (in similar condition), find the cap rate, apply it to your property, and back out for a price. Ask how old the roof, furnace, hot water heaters are. Factor deferred maintenance into your price consideration.  The numbers might look great as it stands, but you might be inheriting a ton of deferred maintenance  which would negate any discount you thought you had. 

Rental Income

Double check the stated rent in your area.  Tenants already in place, but if they vacate you want to know you can fill it with at least the same rent. 

One of the things that could crush you is long-term vacancy.  You can run a quick check online on rental vacancy numbers in the area or reach out to property managers to get some insight. 

Costs

I try to use a worst case for all of my estimates.  Theoretically worst case could actually be worse than my worst case, but that's a risk you'll have to take.

-CapEx & Maintenance - Common practice is 10% combined for both.  I do 15%. 

-Utilities, Water, & Garbage - Who pays? How much is it? 

-Vacancy Allowance - I do 1 month of rent. 

-Property Management - Most companies charge 10%, it ends up being 12-14% if you consider tenant placement & marketing costs. 

-Misc Expenses (landscaping, snow removal, etc.)

-Property Tax - Is $1700 the tax amount you'll see after you've purchased the property? Or is it just what the current owner is paying?

-Insurance - There are sites that'll spit out an avg for a zip. Or you could reach out to insurance companies and get a quote. 

With the info above you can calculate your projected NOI. Subtract your loan payment from that and you'll have your projected Cash Flow. Divide that by your initial investment (down payment + closing costs + rehab) and you'll get your cash on cash return.