New Investor Deal Analysis

[Michael Paling]

Hey all,

I’ve got a potential deal in Ishpeming, Michigan that I’d like to get some input on my evaluation results:

TLDR; Property cashflows $190 but the COC return is only 4.9% due to assumed soon needed repairs (roof and drywalling/maintenance). As a first-time investor, I'm thinking the COC isn't great and doesn't provide me enough room for errors so I'm better off to keep looking. thoughts?

Property details: Side by side duplex, 2 bed/1 bath in each unit, 2002 sq ft

Asking price is $120K.

Current total rent is $1175, but similar units are going for ~$1500 to $1600. These tenants have been around a while. Increasing rent >30% is another potential issue. 

Estimated fixed expenses (utilities [monthly averaged], insurance, taxes) are $530, and I’ve allocated $200 (12.5%) from rent for Capital expenses, and about $125 for an “inexperienced buffer”. I estimated the vacancy at 5% ($80), because there’s quite a high need for rentals right now.

It was built in the “1900’s” and the owner has owned it since 2003, but it doesn’t look like many updates have been made, except maybe siding. There’s no mention of the roof age, so I’m assuming it’ll need replacing soon, especially since the edges of the shingle are curling. There are several cracks in the drywalling that needs fixing. I don’t really know how to estimate these costs yet, but I’ve estimated $20K for costs. I’m thinking that’s conservative though.

With all this, I was looking at offering $110K, so mortgage expenses would be about $475. Similar Neighborhood duplexes haven’t sold at $120K just yet.

Numbers summary:

Monthly rent = $1600

Fixed Expenses = $530

CapEx = $200

“Inexperienced Buffer” = $125

Vacancy = $80

Mortgage = $475

Cashflow = $190

Cash-on-cash return = 4.9% with $20k repairs. If repairs are closer to $10K, COC would be 6.3%.

Since this is my first investment, I'm thinking the overall COC really isn't great and doesn't leave me room for error with the roof and maintenance costs. Or am I overthinking this? I'd love any input!