Deal analysis please?

[Randall Williams]

Hi everybody, and thanks for any ideas you might have about this. I looked at my first potential rental unit last week, and I'm pretty sure I'm going to pass. Here's the skizzy:

Two-family unit, B-grade, fair condition, 10 minute walk from my home. Water heaters seem to be in good to very good condition, propane boiler appears to be in very good shape, roof looks good. Plaster walls with some crumbling, electric seems all solid. Last year's rough numbers are below:

Asking price: $93,500.

Units rent for $650/$975 each, total yearly rent $19,500

Taxes: ($2,850)

Insurance ($485) 

Propane ($2,326)

Yard ($605)

Water/Sewer ($597)

Other Expenses ($868)

Total Operating expenses ($7,790)

Last year's financing put the owner at a 12.5% cap rate, and a net yearly cash flow of just over $6K.

I can finance it on a HELOC from my home, 3.5% over 15 years with $2K in closing costs. A commercial loan is 5%+ on 20 years, with $3-4K closing costs, (boo-hiss.) If I finance $90K, payments are $650. If I finance $70K and pay the rest in cash, my monthly is just at $500.

if $650, projected annual return is $3910 assuming the above numbers hold and 100% occupancy (risky assumption)

if I drop $20K into the place in cash, my monthly payment is $500, and yearly return is $5710, again assuming a perfect world and full occupancy.

The best tweak I could see to the above numbers would be investing in separate on-demand heaters for each unit so that the propane cost was passed on, though I haven't looked into area rents enough to know if that would be competitive. 

It feels potentially too risky for me as a first-timer - a large expenditure over the first several years wouldn't be unlikely, and that would destroy any small profit the rental would make. Plus, it feels like lots of potential hassle and risk for a few hundred a month, versus other potential options.

Am I missing something besides the obvious 2% rule? I'd be grateful to hear your perspective on this deal if you have a minute. 

Thanks!

[Account Closed]

Originally posted by @Randall Williams:

Hi everybody, and thanks for any ideas you might have about this. I looked at my first potential rental unit last week, and I'm pretty sure I'm going to pass. Here's the skizzy:

Two-family unit, B-grade, fair condition, 10 minute walk from my home. Water heaters seem to be in good to very good condition, propane boiler appears to be in very good shape, roof looks good. Plaster walls with some crumbling, electric seems all solid. Last year's rough numbers are below:

Asking price: $93,500.

Units rent for $650/$975 each, total yearly rent

Last year's financing put the owner at a 12.5% cap rate, and a net yearly cash flow of just over $6K.

please explain how the cap rate is affected by last years financing.