Triplex Deal; Need Finance Advice

[Aaron B.]

2300 Sq ft Triplex

List Price: $600 k

Unit 1: 2 BR $1850/month

Unit 2: 2 BR $1600/month

Unit 3: 1 BR $1100/month

Total Rent: $4550/month

Gross Income: $54,600/yr

GRM: 11

Assuming taxes and maintenance are 1.5% of list, each, then 

Expenses: $16,000/yr

NOI: $38,600/yr

Property Info:

Units appear to have been recently renovated, so there doesn't look like there is much forced appreciation potential besides some landscaping opportunity or just rent increases. The property is well situated to accommodate yuppies working all over Houston or alternatively, college students attending higher education institutions nearby.

Market Thoughts/Demand Outlook:

The Houston market may have a bobble with recent oil price volatility, but other forces will make certain markets in Houston a great investment. Rentals may be a more and more attractive option here as housing prices have appreciated considerably over the past 18 months. 

My Plan:

I plan to own 1.5 million in assets within the next 5 years. I want to replace work income with rental cash flow and I plan to refinance on appreciation gains in order to expand my holdings at a faster yet responsible pace. I currently have no personal capital to bring to the table. 

Unknowns:

The submarket typical GRM.

The rent market's pricing profile

My Question:

Since this is residential property,  I could technically put 10% down with a conventional loan.  I find I can make cash flow with a 10 to 20% down payment;  however,  I've read that margin should be on the order of 15%. To give a 15% margin, I calculated that I would need to put $220k down (>30%). I think this difficult margin hurdle exists because of the high list price. Am I misunderstanding this concept of margin? Or am I over emphasizing it? Regardless,  a private loan on that large of a down payment seems like a rough way to get started. It may even be a prohibitively risky deal.

I'm excited to hear your thoughts.

[Nathan Emmert]

I'll be honest, I have no idea what you're talking about.  I read this early in the morning so probably breezed through some numbers I shouldn't have...

But you say taxes and maintenance are 1.5% of list price... each... 1.5 + 1.5 = 3%... right?  3% of $600,000 = $18,000 but your expenses are only $16,000 a year?

What about property insurance?

In a triplex, the owner generally pays water/sewer/trash, where is that expense?

Who is taking care of the landscaping?

Where is the property management cost?

You aren't expecting any vacancies?

Are you CAPEX expenses figured into your maintenance budget or separate? What about the cost to get your vacancies rent ready and other repairs?

Texas isn't a low tax state... I would expect half your GOI to go towards expenses in the long term.  If they are recently renovated you'll likely be lower than that for the first 5 years or so as stuff ages.

Given all that, this property generates less than 1% rent versus the purchase price. With a 25% down payment you'll be lucky to break even. In my market I can "buy" that much rental income for less than $300k straight off the MLS. I'm not saying it's not a good deal for your area (I don't know your market) but it's a terrible deal from a cash flow or CoC perspective.