My First Post and First Deal!

[Issac P.]

Hi all!

This is my first post on Bigger Pockets but I've been following the forums for a while and have listened to almost all the podcasts!

I'm looking at a non-MLS duplex deal I found in the Minneapolis area in a neighborhood that is probably a "B" neighborhood but is very quickly gentrifying with the city pouring lots of money and attention into this area. Lots of new businesses are popping up and the demographic is changing very quickly.

I've included the numbers below over a 10 year period and I would love people's thoughts.

Asking Price: $235,000 ($240,000 including closing costs)

Annual Rent: $22200 could be raised to a market rate of $ 26,400 (this is what I'm basing the IRR below on).

Vacancy & Credit $1400

Annual Insurance: $2500

Licenses: $100

Property Management (10% of gross rent): $ 2640

Annual Repairs and Maintenance (including turnover costs): $3000

Property Taxes: $4000

Trash, Water, Sewer: $400

Total Expenses: $12640

Net Income: $12360

Cap Rate: 5.15%

Cap Rate on Purchase Price/Closing Cost of $220,000 (1% rule): 5.61%

The IRR below has been based on a yearly rent increase of 5% and a yearly increase in expenses of 2%.

IRR on Purchase Price of $240,000:

Initial Investment (as negative amount) (20% down)	(48,000)
Cash Flow, End of Year 1	1600.32
Cash Flow, End of Year 2	2602.32
Cash Flow, End of Year 3	3661.86
Cash Flow, End of Year 4	4781.9658
Cash Flow, End of Year 5	5965.817466
Cash Flow, End of Year 6	7216.75710282
Cash Flow, End of Year 7	8538.2970167514
Cash Flow, End of Year 8	9934.12828755518
Cash Flow, End of Year 9	11408.1297702985
Cash Flow, End of Year 10	12964.3775485462
Internal Rate of Return	5.37%

IRR on Purchase Price of $220,000:

Initial Investment (as negative amount) (20% down)	(44,000)
Cash Flow, End of Year 1	2517
Cash Flow, End of Year 2	3519
Cash Flow, End of Year 3	4578.54
Cash Flow, End of Year 4	5698.6458
Cash Flow, End of Year 5	6882.497466
Cash Flow, End of Year 6	8133.43710282
Cash Flow, End of Year 7	9454.9770167514
Cash Flow, End of Year 8	10850.8082875552
Cash Flow, End of Year 9	12324.8097702985
Cash Flow, End of Year 10	13881.0575485462
Internal Rate of Return	9.13%

A couple questions:

1. Do my expenses look reasonable? I'm having a hard time estimating out the annual Maintenance/Repair costs. I decided to go slightly higher as I haven't included the cost of hiring a lawn/snow service.

2. If I'm benchmarking this investment against the S&P 500 which returns about 9% annually with dividends reinvested over the past 30-40 years, would IRR be the correct tool to use?

3. If IRR would be the correct tool to use, even purchasing a property at the 1% rule gives me a return over 10 years that is worse than passively investing in the S&P 500. What am I missing here? I was hoping to do an IRR over 5 years but this gave me a negative return. I don't want to include appreciation in value because I don't know how to estimate that, and any attempt to would be speculation. I guess I could include equity buildup but I wanted to look at cash flow only. Thoughts?

4. Does a cap rate in the 5% range for a duplex that is meeting the 1% rule in an up and coming Minneapolis neighborhood seem reasonable? That seems really really low to me.

5. Does a yearly increase in rent of 5% and an increase in expenses of 2% seem reasonable for IRR calculations?

I really appreciate the input that people provide!