Is this triplex worth it? Downtown Sacramento

[Minka Sha]

Looking at a triplex near downtown in Sacramento. It's listed at 354,500. Now, when I do the math, I'm coming with a cash to cash rate of 7% with an offer of 330k but a cap rate of 3.3%. MLS: 14048301

- What does it mean that the cash on cash rate is higher than the cap rate?

- Is this not a good buy? 

The property has 3 units rented at:

3BR 2BA: 1050

2BR 1BA: 700

2BR 1BA: 725

Thank you in advance for your replies and suggestions!

[Taylor McClung]

Minka,

I would suggest reassessing some of the numbers. From experience at my properties in Sacramento, see some notations I made below to your figures and see what you think. Another aspect to think about is demographics of renters and location. This property would be nestled in between two freeways right off Alhambra which sees a lot of transient foot traffic. Rents are low too, however, that probably reflects the location and demographics you can attract. I have one bedrooms in midtown renting for $975, just to give you a geographic comparison of how sac rent rates vary by area.

It has been fun to run numbers and hope it helps you make an informed decision.

Taylor

Thank you for your input Taylor. For my cap rate calculation. I am adding up all the expenses besides mortgage and then dividing by the purchase price.

Here is a break-down of the monthly expenses: Assuming, 5% vacancy rate, 1.2% tax rate and 6% property management.

mortgage$ 1,332.65

insurance (fixed)$ 83.33

vacancy rate$ 122.50

taxes$ 330.00

(Assuming a 330k purchase price. Investment properties in Sac are competitive, so you may not be able to get your offer price. If not, then taxes are $354. Also Sac city charges you rental inspection fee ($25unit annually, plus fire inspection fee of $45 annually, plus business tax which is roughly $50 annually).

property mgr / maintenance$ 147.00
(Quality property mgmt in sacramento runs upwards of 7.5-10%, making this number closer to $185-$247. Also, don't forget placement fees and project surcharges your mgmg company may assess.)

water bill$ 100.00

(landlord pays water, sewer, and garbage, which works out to roughly $250-275 for a triplex.)

cost of landlord$ 75.00
(what exactly is this for? are you referring to some sort of mgmt fee not included in prop. mgmt?)

misc big ticket items$ 100.00

(i know this property looks like it was renovated, so it might be safe to assume only $100/month for the first year or two, but consider when you have to replace carpet, paint, hiring a plumber/electrician, etc. This can easily add up to $2000-3000+/year.)

TOTAL MONTHLY EXPENSES (with mortgage)$ 1,868.49

(Given my above numbers which would be conservative, monthly expenses work out to $2738 +any extra prop mgmt fees as noted above)

TOTAL MONTHLY EXPENSES (without mortgage)$ 957.83 

(Calculate using conservative numbers)

TOTAL YEARLY EXPENSES (with mortgage)$26,885.82

($32856 using conservative numbers)

Yearly Cash Flow (with mortgage) $2,514.18

($-3156)