What am I missing on this deal?

[Andrew Dillard]

I am looking at purchasing a multi family deal in my local market. 

Deal Stats:

Price (Current List): $109,900

2 Separate duplex properties on the same lot for a total of 4 units.

7 bedrooms 5 bathrooms

All units recently renovated

Income

Gross Monthly Rent: $2,400

Expenses:

Mortgage: $500

CapEx: 3%/mo = $72

Repairs: 3%/mo = $72

Insurance: $150/mo

Property Taxes: $130/mo

All utilities are the responsibilities of the tenants

I will be managing the property myself

Total expenses/month = $924

Based on the BP Rental Tool I get the following results:

Pro Forma Cap Rate: 21.12%

Cash on Cash ROI: 222.05%

Income-Expense Ratio (2% Rule): 2.14%

Debt Coverage Ratio: 3.97

Monthly Cashflow: $1,479.39

NOI: $23,734

The Market:

Where this house is located, 44% of the market is renting vs 33% for the state

The most popular type of rental is 2 bedrooms, which are 3 of the 4 units in this deal.

Median Rent is slightly less than the current rent on these units.  How much of an issue is this?  All units were recently renovated and are in great shape.

What am I missing?  This deal seems like its too good to be true compared to some of the other deals I've analyzed.  No updates needed, 4 units for ~$100,000.  Any thoughts if this is too good to be true or is it really a good deal?

[Edward B.]

@Andrew Dillard,

I calculate 10%-15% for maintenance alone depending on the property.

CapEx is where a lot of investors get killed. Ben Leybovich has many opinions on the topic and I would read his blog posts. I don't totally subscribe to his arguments but you can't go wrong listening to him because he brings up excellent points that are missed by many new investors who do not figure in those things until they get hit with $10k in roof repairs or $5k for HVAC repairs or even $1k for hot water heaters, or all of it. I can pretty much guarantee you that $72/mo is not going to cover everything you will run into if you hold these properties for long. I would figure at least 10% and maybe more, again dependent on the property. The best way to do it is to budget for actual expenses. Estimate the costs of all the major systems and such, determine their remaining useful life, and then breakdown a monthly amount to go toward your reserve fund to cover those expenses when they arrive. It will be much higher than 3%. I believe there may be a spreadsheet in the files section on BP that could get you started.

For vacancy I would go with the market standard in your area for your property type or maybe a minimum of 5%-8% just to account for turnover and such.

And even though you plan to manage your self, I highly recommend that you run your numbers as if a property manager were in place for a couple of reasons. 1) What if you don't want to or can't manage them any more. If you didn't allow for that you will be stuck. And 2) if you go to sell or refinance, the next investor or lender likely will be factoring that in so you want to ensure you don't over pay now.