Rate My First Deal

[Nathan W.]

Hey everyone, thanks for the great resource here. I have learned a lot since becoming a member and am about to pull the trigger on my first property. I live in DC so the prices here do not warrant a buy and hold strategy so I expanded my search out to smaller cities in Virginia. I settled on a duplex in Roanoke. Listed at $88k (on the market for 250 or so days), offered $78, seller countered at full list price (umm ok), I threw them a bone at $81.5, and they countered at $82k. Ohhhh k, so I guess I can get it for $82.

The numbers are below

Income:

Unit A Rent: $495

Unit B Rent: $555

Unit B Pet Fee: $10 (wow)

Vacancy Estimate: 8.3% (one month/year)

NRI: $972/month $11,660/year

Expenses:
Management: 10%($97/month)

Leasing Fees: $75 (only for turnover, not renewals)

Repairs/Maintenance: 10% ($97/month)

Taxes: $54/month

HOI: $65/month

Utilities (water): $80/month

Lawn Care (every other week for half the year): $38

NOE: $444/month, $5,324/year

Mortgage (20% down @ 5.125%): $357

NOI: $528/month, $6335/year

Cash Flow: $171/month, $2049/year

Expense Ratio: 45.7%

Cap Rate: 7.7%

Rent/Value Ratio: 1.29%

Cash on Cash Return: 10.9%

Anything that you guys see I may be missing? Are my numbers pretty solid? Cash flow is not the greatest but the rents are under market right now and the tenants have been there for 2+ years so the vacancy rates are good and I should be able to raise rents when they move on (that $10 pet fee was ridiculously low).

Appreciate your thoughts.

[Wendell De Guzman]

Nathan,

It's an OK deal. It's not great. It's not bad. Just OK (based on my analysis, you will make a little over $100 a month and your money will give you a return shy of 9% which is better than the returns you get from CDs). If you are confident you can raise the rents, then by all means buy it. It's not negative cashflow so at least the property can sustain itself as you're raising the rents. Below is the screenshot of the spreadsheet I use to analyze deals. You can download it from the FilePlace here on BP.

In addition to the numbers, you have to do your due diligence. Hire an inspector to give you a list of deferred maintenance items and how much it will cost. You can negotiate a deferred maintenance credit at closing. Also, you can schedule the closing closer to the 1st of the month (say on the 5th), so the prorated rents can be credited to you or can reduce the money you need to bring at closing. How's the crime in the area? Walk the neighborhood at night. Real estate is MORE than just the numbers. Ask me how I know. I made a terrible mistake on a multi family apartment once (the numbers are great but...). I revealed it here in a podcast with Brandon Turner and Josh Dorkin.