I'm only looking at Cash on Cash - am I being stupid on this one?

Question

I currently have a deal under contract for a buy and hold 2-fam in Island Park NY (for those of you unfamiliar it's in Nassau county Long Island)   House prices are high here so hitting something like Brandon's 2% rule is impossible - but rental prices are high and the demand is high if you have a decent apt.

So I've only been doing the deal numbers looking at the CoCROI.  It's a $550k purchase and I can easily get $5k per month in gross rent (it's a 3/1.5 over a 4/2). Which with pretty conservative numbers nets me a 7.7% Cash on Cash (with 25% down) - it goes to 11.8%  for the first year when compounded with equity pay down.   And it's ultra turnkey, I only need to put a wash/dry upstairs and it's perfect.   It was hit bad by Superstorm Sandy so everything is new on the first level and the roof is only 2 years old.  Plus the owners were the one who lived in the lower unit it so it's done up to the 9's - granite, hard wood, stainless steel, cable wired in the walls, high hats, etc.... I'll be able to get a renter in that unit the day I close on it.

But I I think I'm over paying for it by a good 5%-7% - there was a bit of a bidding war and I wound up going about $15k above list for it because the ROI kept working.

So I'd love opinions on if I'm being an idiot for only looking at the Cash on Cash and not caring about the purchase price.  In my mind it's a buy a hold and I'm not going to plan on selling it any time soon so I won't get hit with that loss - and I never buy for appreciate, only for cash flow.    Let me know your thoughts and if you think I'm not looking at something crucial in the equation.

-S

Scott Williams · Answer

I used to be an insurance adjuster and you need to look at that policy VERY carefully. Regular policies do not cover damages caused by "rising water" (i.e. water coming from the ground up, which is tidal surge or flooding). This is what flood insurance is for. So you may think you're covered for rental income loss, but likely are not covered if the house is wiped out by flood. I would call your insurance claims department to double check this. Do no call the agent as most of them don't know how to read the actual policy properly, they just sell them. You don't want to buy this thinking you're covered and you're actually not because it's just a matter of time before Long Island gets wiped out again. Good luck with the purchase.

Bill Schrimpf · Answer

This seems more like a speculation play for appreciation than an investment.  'They' say a good/bad deal is made when you buy.

I hope the cash-flow works as you plan!  If the cash-flow is reliable, it's probably OK.  It doesn't look like a great deal but maybe decent given enough time and luck.

Personally, I would have passed because I do not want to have that much capital and credit tied up for as long as it's probably going to take.  5% below what you paid, you have to wait for at least 13% appreciation before you can sell to break even.  5% to get back to zero + 6% to realtors + another 1-2% in other misc fees and charges sellers usually get hit with, and dont forget Uncle Sam's cut.   You can't refi for an unknown period of time, probably a long while.

Bill Schrimpf · Answer

Hi @Stephen Loguidice, hitting 2% "rule" where I live is hard too.  Its frustrating but its a guideline, not really a rule.

The answer to your question is "it depends."  One of the best things I've learned here on BP is to have more than one exit strategy.  Your primary goal may be to buy and hold, and it sounds like you want to self manage and that plan may work.  Will the place cashflow if you pay for a property manager; could you pay 6+ months of mortgage w/o renters WHEN (not if) the next Sandy hits?  What are insurance costs and taxes?

Stephen Loguidice · Answer

Bill Schrimpf  that's sound advice, I got caught up on the cash flow I forgot to think about exit strategies if I need my capital.   I appreciate the insight.

Tzvi Balsam · Answer

@Stephen Loguidice

South Bronx

Jersey city

east NY

East Flatbush

And the list goes on and on.

Stephen Loguidice · Answer

That's awesome on your property, 30%+ in a year is what dreams are made of.  Brooklyn is so nuts right now, I know someone who grabbed something  out there 2.5 years ago for $500k, it's worth $3MM now.

I don't have the knowledge or connections In that market or I'd be hunting there myself.  I keep hearing the South Bronx is gonna be the next one as more and more people get pushed out of Manhattan.  Just FYI

Stephen Loguidice · Answer

Thanks, I've checked with my broker and he claims I have a business policy so it covers loss of rent regardless of where the damage come from but I will definitely cal my claims department off of your advice

Tzvi Balsam · Answer

@Stephen Loguidice

It is NY prices just keep going up,  bought my house in Brooklyn a year ago for 75K bidding war. got it at 825K its worth now 1.1 million.

Stephen Loguidice · Answer

Hi @Bill S. yeah it will still cashflow if I were to pay a property manager - even if I factor in up to 10% for PM it's still netting me 4.4%.  As for your question on another disaster I have a renters clause in my HOI where if my tenants are displaced my insurance pays the lost rent - I have to look at the policy on my other house on how long it goes for but I think it's for up to 6 months.   So with that being said if this house comes back valued at 5% below purchase would you say it's a bad deal?

I'm only looking at Cash on Cash - am I being stupid on this one?

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