New Rental Calculation

[Tom Burke]

Regarding a two-unit I'm looking to buy, hold and rent: What am I missing in my calculations?  Also, do my estimates seem to be appropriate?

Data: A potential offer: $95,000  --  Closing cost: $3,000  --  Initial Renovation: $5,000 (paint, carpeting; approx 2000 sf)  --  Estimated rent/month: 1,500 total both units  --  Loan amount/I.R./term: $75,000/5.5%/30 years  --  Monthly mortgage payment: $432.00  --  Annual taxes: $1,915 --  Annual insurance: $1,000  --  Annual repairs and maint.: $1,500 --  PM fee: 10%  --  Vacancy rate: 10%.  

I'm coming up with $400 monthly cash flow, a cap rate of 9.70%, up-front cash of $27,000, with a 17.91% Cash-on-cash ROI.

I know I don't specifically call out a percent for cap. expenditures, but in your opinion, can my estimate of annual repairs of $1,500 account for cap. ex. also?

What else am I missing here? Thoughts?

[Corby Goade]

On a cursory glance, it looks to be a good deal, of course, without having any idea of the neighborhood or your personal REI goals. I am always reticent to answer questions like this, because a "good deal" is a very different thing to different people. A couple thoughts; I'd budget more for renovation. Once you get at it, there's always more that you want or need to do. New carpet and paint and all of the sudden the contrast of the 1980s vanity looks awful, or the light fixtures stand out as being very dated.

Secondly, you mention cap rates a couple times. I think BP does a great disservice to residential investors by talking about cap rates and including the calculation in their calculators. Cap rates are not meaningful measures of value or returns on residential properties (four units or less). Cap rates are designed for commercial properties, which are valued and comped in a completely different way from residential properties, and it can be confusing and throw people off- it makes focusing on your goals, especially when you are new, much more difficult. 

This cap rate issue is not exclusive to you or to BP. I am an agent, and I hear agents with decades of experience trying to sell SFH rentals to investors using cap rates. Drives me crazy!

Good luck!