Multi-family - does this number work?

Question

Hello BP members,

I am a newbie trying to get my feet wet in RE investing. We have 2 single family rentals and trying to get my very first duplex. It is a 2 bedrooms /unit. Here are the basic numbers:

Asking Price: 158,000

Mortgage, Ins, Tax: 800/month

Estimated rent in my area: 1,400/month (for 2 units)

Down payment : 25% = 40,000

Is this a good investment? What am I missing? My last 2 previous single family rentals are paid in cash (I know it's not very smart). I am just nervous about leveraging and what if it does not work out like I expected.

I appreciate any input.

Thanks

Aaron Montague · Answer

Nothing wrong with paying in cash.  Just think of it as equity waiting to be tapped...

This place... doubtful.  Here are the number as I see them:

Mortgage Rate 5.00%

Length of Mortgage in years 30

Monthly Mortgage payment $636.13

Taxes $100.00

Sewer and Water $100.00 (this is a guess)

Trash $- (is this covered by your taxes?)

Heat/Utilities $- ( no common light bulbs ANYWHERE?)

HOA $-

Cap Ex and Ops $150.00 (this is my minimum per roof. It covers the future expense of everything from roofs to plowing)

Insurance $65.00

Mgmt Fee $140.00 (10%)

Vacancy $112.00 (8%)

Total Expenses $1,303.13

Unit 1 $700.00

Unit 2 $700.00

Total Revenue $1,400.00

Cashflow/month $96.87

Cash on Cash Return 2.58%

Yup, lousy.  I'd pay $92,900 for this place to get my numbers (15% Cash on Cash AND $100/door/month)

John Steele · Answer

@Lan Huynh A general rule that some experienced investors and my accountant have told me is that the property should rent for 1% or more of the purchase price (the BiggerPockets beginner guide suggests 2% but that can be extremely hard if not impossible depending on the area). This is obviously just a very quick calculation and can't be applied to everything but if the purchase price is $158k and your looking at $1,400 per month rent your at .88%. You may still be able to make money but I would venture to say that there are deals that may be better worth your time.

@Aaron Montague excellent breakdown!

Account Closed · Answer

Welcome to BP. Sounds like a great investment. I have property in South Jersey and am looking to close on a property in West Philly this month.

Great luck, see you around.

Aaron Montague · Answer

"Therefore, we will be managing it instead of paying 10% fee."

@Lan Huynh

If you make this deal without figuring PM fees you are trapping yourself for the foreseeable future.

Some of the following are possible reason you might hire a PM for this property:

1. You may want to move away

2. You find yourself too busy with other aspects of your business

3. Family time takes president

4. Better investment comes along that you want to manage

etc, etc

Even if you don't want to pay the 10% out, make sure it comes out of the budget each month.  What you do with it is up to you.  I'd pay myself but it could also be used to buffer the Cap Ex budget, pay down the mortgage or put back into your company's general investing fund.

Always figure in something significant for PM fees.

Judy C. · Answer

They tenants will pay all of their own utilities?  Are they separately metered?  What about lawn care?  Will the tenants provide their own?  If so, do they have a place to store their lawn equipment?

If the tenants pay their own utilities and they are separately metered, that helps.  Otherwise, the landlord sometimes ends up getting stuck with some utilities.  If the tenants take care of both and the property is well maintained, I would consider it.

I look at Mortgage, Insurance, Taxes,  Management (10%), Vacancy (5% varies), Maintenance (10%?).  Then see what my cash on cash return and cap rate would be.

Phil Teague · Answer

Lan,

You shouldn't pay more than $100,000. for the property given those financials to make this investment work.

Phil Teague

Mehran K. · Answer

@Lan Huynh Even though you'll be doing your own managing, it's great to factor in the 10% expense either way. Your time is valuable and you should be theoretically paying yourself for the time managing the building. Also, in the future you may want to outsource the management to a property manager so you can do other things like go on vacation :) I'm a believer that it's just good practice not to get the habit of "creative accounting" to make a deal seem better than it is.

Always factor in the PM fee!

Account Closed · Answer

At the full purchase price that's a 9.4 GRM.  Is that typical, high or low for similar properties that have sold recently?

Chris Smith · Answer

Welcome @Lan Huynh !  I agree with the comments above.  The numbers just don't work for me.  You definitely must find out the tenants payment history for both units.  I think @Aaron Montague covered everything!  Great breakdown.

You are doing the right thing by stopping and really taking a look before jumping in.  Good Luck and Happy Investing.

Lan Huynh · Answer

@Aaron Montague Thank you for your input. It is a great expense break down. In my area, I don't have to pay HOA and trash. The property is about 2 miles from my house. Therefore, we will be managing it instead of paying 10% fee. However, I think it is still a low ROI considering $40,000 down.

@Jonathan K. The listing states that both units are occupied. I am trying to find out how much the rent are from my agent. 2 units in my area runs anywhere from $650-900

@John Steele I thought about the 1% rule too. It is hard to find a good deal in Philadelphia, especially safe enough neighborhood. One of our single house rentals is in NC but it is too far away to manage. NC has much better deals. But because of the distance, my husband is strongly against the idea of buying another one down there

Multi-family - does this number work?

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