First time poster-- Pls help with my deal analysis

[John Gonzalez]

Hi Guys/Gals, 

I am a new member that finally saved up for a year and have enough to get into a low DP property. I have a property in mind that has an asking price way higher than I think would be profitable but have figured out what the numbers should be and wanted your advice to see if I am doing things right. The property I am looking at is a duplex in Florida. My imminent goal is to reduce my $1700 dollar rent by getting into a duplex or larger property and having a tenant pay or help pay for the mortgage. (I'm new to this but reading The Book on Rental Property Investing, I think is referred to as Hacking a  Property). I've been reading 3 books a week trying to get some knowledge since right now I am low on knowledge but high on time and passion to learn. I would appreciate any advice you could provide. 

The property is a duplex going for an asking price of $375k build in the 1920s in Florida. It has two units- a 2br/2ba unit and a 1br/1ba unit. It is close to public transportation and directly next to a rail station. The property is stated to bring in $2000 for the 2br unit a month and $1000 for the 1br unit. I have asked for a pro-forma but have yet to receive one (the agent doesn't seem too professional). I hope to send an LOI if I am interested and then lock up the unit and then really verify the numbers.

Here are the numbers:

Asking Price:                   $375,000

Gross Rental Income:     $3,000 pm/ $36,000 py

Vacancy Loss (10%):      $300 pm/ $3,600 py

Total Operating Income: $2,700 pm/ $32,400 py

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Expenses: 

Insurance:   roughly $150 pm/ $1,800 py

Taxes:         roughly $650max pm/ $7,800 py

Water:         $80 pm/ $960 py

(If I add the 5% each for repair and capital expenditures as suggested in The Book then that would be $300pm and $3,600 py less- vacancy for each unit is above)

Total Operating Expenses: $880 pm/ $10,560 py

% Operating Expenses to Income: 32.59%

NOI: $1,820 pm/ $21,840 py

(Should I also be adding an expense for $3000 per unit ($6000 per year for renting out the units since Realtors charge 1 month's rent?)

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Closing Costs: 

I estimated 6%, so roughly $15,000. I would like for the seller to assume some of this. 

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If I got a Purchase Price of $330,000 ($45,000 less than the asking price) this would be the outcome. 

 Purchase Price $330,000

 Down Payment: 20%= $66,000

 Loan Amount: $264,000

 Interest Rate: 3.7%

Loan: Roughly $1400 PI and $2,000 PITI

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Investment Analysis: Settlement fees paid by Buyer

Cash Outlay: $81,840

Total Operating Income: $2,700 pm/ $32,400 py

Less: Total Operating Expenses: $880 pm/ $10,560 py

NOI: $1,820 pm/ $21,840 py

Less Loan Payment: $1,400 pm/ $16,800 py

CASH FLOW: $420 pm/ $5,040 py

CASH ON CASH: 6.16%

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Investment Analysis: Settlement added into loan amount

Cash Outlay: $66,000

Total Operating Income: $2,700 pm/ $32,400 py

Less: Total Operating Expenses: $880 pm/ $10,560 py

NOI: $1,820 pm/ $21,840 py

Less Loan Payment: $1,400 pm/ $16,800 py

CASH FLOW: $420 pm/ $5,040 py

CASH ON CASH: 7.64%

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So if I pay $330,000 from what I hear, it isn't a good deal because I should be aiming more for a 10% Cash on Cash return from what I am hearing. But if the vacancy is 5% taking into account the whole property it is $150 pm/$1,800 py---the Cash on Cash goes up to 8.36% and 10.36% respectively above. 

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I am more likely to get an FHA loan if I can get the buyer to accept it, otherwise I still don't have that much downpayment and closing ready for the deal. I would like to live in the unit for the next couple of years so I can build up some more capital.

If I do the FHA analysis the below analysis follows:

I account a savings of $1650 for taking that rental expense I have monthly off my hands but also take into account I won't be making the $1000 the smaller unit rents out for. If I buy the property for $330,000 putting down 3.5% and the that $1650 I saves as additional income this is what follows: 

Gross Rental Income:  $3,600 pm/ $43,200 py

Vacancy Loss: 5%: $180 pm/ 2,160 py

Total Operating Income: $3,420 pm/ $41,040 py

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Total Operating Expenses: $880 pm/ $10,560 py

% Operating Expenses to Income: 25.73%

NOI: $2,540 pm/ $30,480 py

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Purchase Price $330,000

Down Payment: 3.5%= $11,550

Loan Amount: $318,450

Interest Rate: 3.7%  30yrs

Loan: Roughly $1400 PI and $2,000 PITI

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Roughly $15,000 closing costs

Total Cash Outlay: $25,880

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Loan:

Monthly PI: 1,400

PITI: $2,000

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Investment Analysis: Settlement fees paid by Buyer

Cash Outlay: $25,880

Total Operating Income: $3,420 pm/ $41,040 py

Less: Total Operating Expenses: $880 pm/ $10,560 py

NOI: $2,540 pm/ $30,480 py

Less Loan Payment: $1,400 pm/ $16,800 py

CASH FLOW: $1,140 pm/ $13,680 py

CASH ON CASH: 52.86%

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Investment Analysis: Settlement fees paid by Buyer

Cash Outlay: $11,550

Total Operating Income: $3,420 pm/ $41,040 py

Less: Total Operating Expenses: $880 pm/ $10,560 py

NOI: $2,540 pm/ $30,480 py

Less Loan Payment: $1,400 pm/ $16,800 py

CASH FLOW: $1,140 pm/ $13,680 py

CASH ON CASH: 118.44%

**So, the deal would be a great deal so long as I want to live there even if I pay more than $330,000 but I should negotiate with it in mind that I will move out so I should aim more for a number that would give me 10% Cash on Cash returns even if I move out? 

How can I get the buyer to eat some of the closing costs and also come down to the $330,000 range? 

Should I also add an 11% management fee into the negotiations since I might need it when I move out? 

Am I missing anything? I think it would be a great deal even if it ends up being more than the $330,000 purchase price above because I can start saving rent and making back my investment now but I'd want to move out one day so I want to take into account the return if I left. 

Sorry if the post was really long. I tried to cover everything. Please share any thoughts and I apologize for any rookie mistakes. 

Thanks!!

[Kyle Myers]

@John Gonzalez Immediately looking at the property it doesn't meet the 1% (or 2%) test.  Also, if you use the 50% rule the cash flow drops to about $100.  You definitely should add the vacancy expeneses and you should calculate costs for a property manager in all your deals unless you want to manage properties for the rest of your life.  I think once you figure in those costs you'll see that this might not be as good a deal as you thought.  Alos, if you're not including gas/electricity make sure they are metered separately for each unit. If you can get it for less than $300k the numbers probably start to look a lot better.