How is my Cash Flow Analysis? Good deal?

Question

Thanks for taking the time to read and comment!

We are looking into buying our first property, and we have $40k with which to begin our investing. My wife is very fiscally conservative, so she does not want to use up the full $40k and rely on our regular savings for reserves.

The property is a ~100 year old duplex in good condition in north central Massachusetts. It has newer windows and roof. It has a letter of lead abatement and is theoretically in overall good condition. The neighborhood is a C on an A-D scale - poor, but not especially crime ridden.

Asking cost: $69,000 (let's assume for now I cannot get them to budge on price)

Initial Investment: $17,475 (25%)

Rental income: $15,600 annual ($650 per month per unit)

Assumed Annual Costs: $12,076

• 10% vacancy - $1560
• $1900 Property Taxes (estimated increase from previous year's actual)
• $900 Insurance (this is really a guess)
• $1000 annual snow removal and "landscaping" (no yard)
• 5% repairs budget and 10% capex - $2808
• $720 water bill (estimated)
• $3188 mortgage (30 years @ 4.5%)

Cash Flow: $3,524

RoI: 20%

CAP Rate: 10%

Can you see any obvious errors in my planning? At what price would you purchase this property?

Thanks again for taking the time to read and review.

Brent Mattison · Answer

Matthew

I would add in another 10 to 12 percent in management fees even if you plan on doing it yourself. It's better to be conservative and see if the deal still makes sense. Hope it works out.

Matthew Brenner · Answer

Update: After some back and forth, the seller has accepted our offer of $60k, which places the property at ~22% RoI after updated expense numbers were crunched. Assuming this drops a little due to unforeseen circumstances, and also assuming we do not walk away dues to home inspection or building code contingencies, we should still have a solid RoI.

Thanks to everyone who chimed in. This thread was a big help on doing the math for our (hopefully) first property.

Max James · Answer

My analysis says to reach a 10% cap rate, you would have to pay $52,520 for the property.  That is with the following assumptions:

Maintenance:  10% of gross rents

CapEx:  10% of gross rents

PM:  10% of gross rents

Vacancy:  8% of gross rents

The rest is based on your inputs for rent/taxes/insurance.

Now, if you assume that your expenses will look like more like this:

Maintenance:  8% of gross rents

CapEx: 10% of gross rents

PM: 2% of gross rents (Assume you create systems for PM and never hire a full time one)

Vacancy: 2% of gross rents (Assuming you can manage this very well, and I assume this for my Class A properties... Probably not the case for this Class)

Then if you wanted to reach a 10% cap rate, you would have to pay $84,480 for the property.

This is a clear example of how you can come up with a valuation of something drastically different, all based on your assumptions you use.

Max James · Answer

Then if you want to look at cash flow, at the assumed 38% of gross rent expense assumption yields $2,523/year and the 22% of gross rent expense assumption yields $5,019/year of cash flow.

Your cash on cash return would be 13% with the 38% of gross rent expense and 25% with the 22% of gross rent expense assumptions.

Syed Khan · Answer

Congrata matt! :) hope everything works out well.

Matthew Brenner · Answer

Thank you for you replies.

I adjusted my numbers and viewed the property. It was solid, with very little work beyond painting and some light handy work. We plan to make an offer, assuming I get good word back from the building inspector about exit locations of the building.

Our goal is to have the property have acceptable cash flow with property management, and great cash flow without management. That way, using management does not hurt us if we find it necessary.

Thanks again for your feedback.

Derreck Wells · Answer

Matthew, PM me the address and I'll check the lead certificate status for you. Just because someone says there's one, doesn't mean there really is, or that its legal.

There was also a lot of illegal certs granted in the early 90s that come back to haunt owners now. The database will say "No Hazards Found" but when the owner goes to get a Post Compliance Assessment Determination (PCAD) done to make sure the units are still in good shape, the inspector finds evidence of deleading work. Well, if there were no hazards found during the initial inspection, what was deleaded? The lead certificate gets recinded and the owner has to jump through hoops to get a "Letter of Environmetal Protection" issued. Getting a "letter" instead or a lead cert can cause higher insurance rates and lower resale value. You can still safely rent it with a "letter" and even get state money (section 8, CTI, etc.), but in the long run, you want the Cert over the letter.

Dominic Lucarelli · Answer

On a duplex that's 100 years old, I'd bump up my repairs to 10% at least, nudge up my CapEx to 12%. That conservative approach should cover you well, barring something catastrophic.

Run your numbers again after that, and shoot for 25% ROI. The seller will negotiate you down no matter what. You'll settle closer to your 20% ROI in the end.

Also, run your numbers with 20% down payment and compare.

Good luck, and keep us posted!

How is my Cash Flow Analysis? Good deal?

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