Please help a newbie out - South Jersey analysis

[Yvette Chung]

Hi all! I have been a long time lurker and finally just acquired our very first rental property. It's a duplex in South Jersey. While i have tried to take everything i learned from BP I am hoping to leverage your expertise. Please let me know what you think of the following #'s.

Purchase Price $172,000

Cash put in (mortgage down payment + rehab/improvements) = ~$55,000

Expenses

Property Tax: $5100 annually or $425 per month

Mortgage P&I per month ~$560 per month

Insurance: budgeting $1000 per year

Utilities (sewer/water/garbage...etc) ~$165 per month

Vacancy: assuming 5%

Maintenance budget: $1500 per year

Income

Unit 1 = $1050

Unit 2 = $1200

Do these numbers look ok? Any considerations that i am blatantly missing? 

Thank you in advance!

[Joe P.]

Hi @Yvette Chung, lets dig in:

25% down would be $43,000, so you think that closing costs, rehab/improvements will be a total of $12,000? Make sure that is in line with your expectations. Closing costs could be 5-10k in SJ so confirm those numbers, and then make sure your rehab budget is independently verified.

Next, assuming your mortgage balance is $129,000 based on the model, and you aren't living in the home, expect at the very best a 4.5% rate, if not higher. So your principal/interest is probably closer to $650+.

For insurance, 1000 seems reasonable, if not a little high, ASSUMING the property is NOT in flood zone. Make sure you check FEMA maps to confirm this. If you are in a flood zone, plan for a NCIP ($700 a year) or NFIP/FEMA backed ($2600) a year additional policy needed to underwrite and maintain a mortgage. Some big banks don't accept NCIP policies.

Utilities seem reasonable -- make sure your tenants cover as much as you can. Depending on your town in SJ you'll have to cover water/sewer. My duplex in Gloucester City is between $2200-$2400 for the year. Tenants pay all other utilities. I would validate these with the local town or have the seller provide you with payment stubs/copies of bills.

Your vacancy should probably be equal to one month rent ($2250) to start. You have no ground experience on what it'll take to turn a unit, to include inspections, repairs, costs, etc. Be conservative to start and pleasantly surprised when things go right, versus hopeful to start and mightily angry when things don't go right because you didn't plan for it financially.

Finally, I don't know the condition of your property, so it'll be difficult for anyone to say what kind of CAPEX/maintenance budget you'll need. Typically I do 10% for EACH line item of total rent per month. Now this provides wildly different results if total rent is $1000 versus $2000, but again, I take a conservative approach with my properties. You only have a maintenance budget listed and I'd argue its a bit low.

Things you could be missing - beyond the items I mentioned above, consider city/township costs for inspections, licenses, fees, etc., landscape/lawn, trash pickup fees, and PROPERTY MANAGEMENT, which you should always account for, if nothing else to pay you for your time. I started out managing my duplex and quickly found that A) I didn't like managing C-class tenants, B) I didn't like chasing people for rent, and C) my level of patience for what I perceived as annoying items (listening to a complaint, scheduling with a handyman to fix, meeting the handyman, etc.) was extremely low, so I got a property manager in place to cover those items for me. An unexpected line item that I didn't consider, but if I did, I either built extra profit for self managing, or covered the cost of a PM.

Off the cuff, depending on the town this is in (appreciation may not be a factor, so rents might be stagnant), I'd say this could be a bunt single. I think you need to re-estimate your costs and see what your monthly cash flow is, and compare that to your overall goal. I personally want at least $150 per door in cash flow and as close to ~10% COC return on any property I pick up. Your goals might be different -- define the goal and then see if the property meets that criteria.

You might want to consider running numbers in the BiggerPockets calculator, but they have a fantastic rule of thumb to help quickly gauge cash flow and COC return -- take total monthly rent x 50% ($1,125 per month), add your PITI (lets call it $1,175 per month - $650 mortgage, $425 taxes, $100 insurance), add up those two numbers (1125+1175 = $2300 per month), and subtract from your monthly rent of $2,250...based on that model, you'd be looking at a $50 cash flow loss per month. It's not a perfect formula, but in year 1, my total expenses were higher than my original budgets...so I lost money year one. Then you need year 2 to go on-budget or better just to get back to even-steven. See the problem?

I'll close with this. The biggest mistake I made as a newbie (and I'm still a newbie) -- prepare mentally and financially for year 1 to not go as expected, with unexpected fixes, items to replace, and now we have coronavirus on top of it, so if you need inspections/licenses those might also be delayed. You should have $5k to $10k in reserves before you even consider buying, in my opinion.