Analysis Help for a New Investor with a Unique Opportunity

[Matthew Brill]

Hello BP community,

I am new to buy and hold investing and have being doing as much reading and learning as possible while looking for deals to get started with. I came across an opportunity involving purchasing duplexes in a new construction project. I would be buying 4 units (2 duplexes) directly from the builder. I networked to meet the builder and his partner and they said they would help me out, saying they would take a smaller margin, help get 0 money down financing, set up property management (which there company does), set up an LLC, and even 1031 to something bigger when the time presented itself.

The proposal is they will sell me each unit for $137,750 which will appraise for $160,000 per unit. This built in equity will supposedly allow me 0 money down. The terms presented to the bank are a 5% loan rate on 5 year terms and a 25 year amortization schedule (I am also currently reaching out to other lenders and trying to improve on these terms). That put the monthly principal and interest cost at $805 per month per unit. They also estimate taxes at $150 a month per unit and insurance at $125 a month per unit for a PITI of $1080 per unit per month.

Their market analysis estimates potential rents of $1320 per month and they claim there is already a waiting list of 125 people.

Assuming all of the above to be accurate, I also calculated the following monthly expenses per unit based off what I have come across in my studying:

Vacancy (1 month per year): $110 (of note, this is part of a 55 years old and up community so possibly a higher likelihood of long term tenants)

Maintenance (5% of rent): $66

Property Management (10% of rent): $132

If I use these expenses at the end of each month I am looking at -$68 per unit per month ($1320 - $1080 - $110 - $66 - $132). I realize that I am also not accounting for capital expenditures. 

I know in general I don't want an asset that results in negative cash flow but I have two questions. 1) Am I possibly overestimating expenses since everything will be brand new? 2) Should I not necessarily be as concerned about the potential negative cash flow since I am getting $22,250 free in equity? I would plan to sell in 5 years, hopefully before any capital expenditures, which would net me $33,448 per unit (taking into account the negative $68 cash flow per month).

I know this was a lengthy post and I appreciate you all taking the time and sharing your thoughts.

Thanks,

Matt