Deal or no Deal?

Question

Hello:

Newbie learning the rope here.  I am looking at an investment property for buy & hold.  Here are my numbers, can anyone comment on this. Whether it's a deal or no deal?

Purchase Price:  190,000 (cash to close = 20% = 38000)

Monthly Rent:  1200 (minimum)

Monthly Expenses:

Tax = (150)

Insurance =  (40)

Property mgt = (108)

Mortgage = (630)

vacancy @10% = (120)

repairs @ 5% = (60)

Total expenses = (1108)

Cashflow = $92 :(

Cap Rate (If I calculated correctly is at 2.9%)

Ken A. · Answer

I have an 11 foot pole and I wouldn't touch it.

Jeff G. · Answer

You will likely lose money on this monthly.  $250/door cash flow is what I look for.  My first duplex does a little better than this.  To me, if I don't have 6K positive cash flow a year its not worth the investment.

Lucas P. · Answer

NO DEAL!

That seems like a terrible deal for a buy and hold. Unless it had a ton of equity build in I wouldn't touch it.

I hope I don't sound presumptuous but I just posted a much better buy and hold in the marketplace.

Joseph Adelmann · Answer

Hey @Patrick C.,

How did you calculate your cap rate? I came up with 4.56% by subtracting all of your monthly expenses except your mortgage from your monthly rent, multiplying that by 12 and then dividing by 190,000. So that ends up as (1200-478)*12/190000. I'm not sure if that is correct but since cap rate is the return if you bought the property in all cash, the mortgage shouldn't be included. What are your real estate investing requirements when it comes to cash flow and cap rate?

Patrick C. · Answer

Thanks @Jeff G. & @Joseph Adelmann. Good to know what you guys are thinking.

Joseph Adelmann · Answer

@Jeff G. provides a good rule of thumb for cash flow. And I've been looking to keep the cap rate above 8% in line with this article from Ali Boone, http://www.biggerpockets.com/renewsblog/2013/01/19/real-estate-math/. Have properties been appreciating at a high rate in the area this property is located? Do you have the opportunity to increase the rent based on a couple of minor improvement? Otherwise it doesn't seem like a great deal.

Patrick C. · Answer

@Joseph Adelmann

Good point on cap rate.

What do people aim for as far as the cap rate and cashflow for buy and hold long term?  Thanks.

Patrick C. · Answer

Hi Sean (@Sean Kruger)

This house doesn't.  My other property does.  That's why I didn't include HOA in the calculation. Thanks.

Sean Kruger · Answer

Most Arizona houses will have an HOA which can range wildly, we have a house as low as $51/m and as high as $110/m.

Sean

Deal or no Deal?

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