Negative $150 per door cashflow to positive $200 per door. Too optimistic?

Question

I purchased my first property back in January. I waited to post until I had a good record of the utilities and expenses. The property is a 3000 sf side-by-side duplex built in 1985 near the university and hospital here. It is a 3 bed / 1.5 bath on one side and 2 bed / 1.5 bath on the other. The layout is symmetric except for the 3rd bedroom is above the garage. I owner-occupy one side but treat the side I occupy (and monthly expenses) like any other rental unit.

Purchase Price:$390,000

Purchase Closing Costs (buyer paid): 7,883.39

Total Price: $397,883.39

Down Payment: 39,000 (10%)

Rate: 4.5%

P&I: $1,778.47

Expenses:

PMI: $ 242.78

Taxes: $454.65
Insurance: $113.19

Vacancy (2%): $68.00 (very good market here)
Repairs (8%): $275.00

CapEx (?%): Not factored in. I read you need 6 months PITI (which I have), but haven’t researched the local costs yet.

Gas: $277

Electric: $28.10

Water/Sewer: $163.31

Expenses Total: $1622.05

Current Rents: $1600, $1500 = $3100

NOI: $3100 - $1622.05 = $1,477.97 -> $17,735.64 per year (including PMI)

Expense:Income -> 52.3%

Cashflow: 3100 – (1622.05+1778.47) = -$300.52

The -$300 cashflow is how the property has been performing since I bought it in February. Since I already have a decent fund for repairs and CapEx, I have been skipping the repairs withholding. Obviously not sustainable long term either.

Total Return for the first year: -3,600(cashflow) + 5,694(equity) + 24,375(6.2% appreciation) + 4,000(tax break) = 31,000

Total paid for property: 46,883.39

Total ROI for first year: (total return/total paid) = 66.1%

There are two things happening in April 2015: Getting a new appraisal to drop the PMI (the market prices here have been growing at 6.2% year over year) and the raising the rent to market rate.

Market Rents: $1750, $1600 = $3350

NOI: $3350 - $1379.15 = $1970.85 -> $24,250 per year

Expense:Income -> 41.2%

Cashflow: 3350 – (1379.15+1778.47) = 192.38 -> 96.19 per door.

There are two projects I have planned for the property in the near future: replacing the 30 year old boiler with a high efficiency one (should knock $100 off heating) and converting the 2bed/3bed configuration to a 3bed/3bed by adding 1 wall, 1 window, and 1 door by splitting the extra large bedroom above the garage. After both of these improvements are implemented the property should perform like:

Market Rents: $1750, $1750 = $3500

NOI: $3500 - $1279.15 = $2220.85 -> $26,650 per year

Expense:Income -> 35.5%

Cashflow: 3500 – (1279.15+1778.47) = $442.38 -> $221.19 per door.

That’s my plus side analysis. My down side (do-nothing) analysis looks like (with rents raised to market):

Market Rents: $1750, $1600 = $3350

NOI: $3350 - $1622.05= $1727.95 -> $20,735 per year

Expense:Income -> 48.4%

Cashflow: 3350 – (1622.05+1778.47) = -50.52 -> -25.26 per door.

Not too great for cashflow if the existing conditions remain unchanged. So, from these numbers it's clear that the PMI, low rents, and somewhat low (10%) down payment are reasons why the cashflow is currently negative. I did know there was a few things that needed to be overcome to get this property cashflowing when I bought it. Any feedback you all have would be great. Also, would you have bought this duplex for a buy and hold?

Jean Bolger · Answer

I would not have bought it as a cash flow investment, but from what I understand from your post you are owner occupying and therefore getting your housing, in a pretty expensive market, for around $300/mo. That's nothing to sneeze at when you're starting out. It frees up a lot of your W2 income for savings or other debt pay down. In your best case scenario for improvement make sure to factor in the costs of doing those improvements (boiler, room addition) and see how long the payoff period would be for them. You may be better off leaving things as they are.

Simon Campbell · Answer

In my opinion, this property will never cash flow. The purchase price was too high for a duplex. Any upgrades, renovation or expansion is only going to worsen the cash flow situation. Especially the 3rd bedroom addition. It will add $150 per month rent or $1,800 annually. I estimate the addition at around $10k. Will you still own the property when the additional rent pays off the cost of the addition.Refinancing is going to incur an additional closing and the thousands associated with that. How long will the new mortgage payment savings take to work off the closing costs?If you enjoy living there and can swing the $1,700 that it will cost you each month, then don't sweat it.

Connor Dunham · Answer

@ Kyle Atans - Yea, it's kind of a weird lender. They have a few options regarding dropping the PMI - pay for an appraisal and show that the current balance is at 80% LTV or less or wait for it to drop automatically @78% LTV with the original appraisal. This lender also offers a streamline refinance which wouldn't be a bad option either since rates have gone down a half percent since I bought. Thanks for the warning about lenders not wanting to drop the PMI and if you have any resources or links about this topic I would appreciate the information.@Wilson Churchill - Yea, we have a 1 car garage for each side. Unfortunately this is Alaska and people love their Garages to keep the car warm. I have considered doing AirBNB, just haven't taken the plunge.

Wilson Churchill · Answer

You might be able to get more income in the mean time by renting any rooms that you don't occupy on your side. Is there a garage that can be rented?

Kalo (Kyle) Atanasoff · Answer

Hi Connor, i have one question regarding PMI - you both the property with 10% down and usually you can avoid PMI after you paid off 20% of the purchase price. I was thinking the same way like you - to to do a new apreisal since the property went up with 15% appreciation for 1 year, but did no work. They are looking how much money to pay off already not what is the current value of the property. Of course, you always have the option to refinance and take an advantage of this appreciation.