GRM? Cap Rate?

[Jonathan Sher]

Hello everyone. This is my first post on the forum besides the new member area. I have been reading a book about investing in Duplexes, Triplexs and Quads. So far, the author has expressed his use of GRM (Gross rent multiple) to do a quick analysis of a property. This ignores expenses, but the author say's that expenses should be fairly constant, which you could argue they are not. What is your method of analyzing a duplex? I am currently looking at a couple of duplexes for sale around my college town. I have found a duplex that is in foreclosure and is 100% vacant. Here is my analysis of income and cash flow

rents $700 x 2 = $1400 a month

Income $16800
Yearly Expenses
($1500) insurance (estimate)
($900) Landscaping
($1,000) Miscellaneous Maintenance
($2,000) Management fee (Don't really have a choice since I will be in saint louis

EBIT = $11,400

($1,700) Taxes (last year was $1500 so I gave myself room)

I get a NOI of 9700 without depreciation and debt service.

Here is my issue, I don't know what to pay for the property.

1.The kitchen's need to be remodeled on both sides, I have a friend that does construction so we would take care of most of the labor. Basically needs new tile, cabinet doors, appliances (including washer and dryer)
2. Need's new garage doors (I think the motors work just needs doors)
3. I won't know the integrity of the room until inspection.

I am going to make an all cash purchase at first so I don't have to worry about financing and paying a mortgage when its vacant... I estimate (and clearly estimate) that I could get away with spending $15,000 on rehabbing and making it look nice without any major finds.... SORRY for the long post

[Jon Holdman]

No, I'm automatically making "expenses" 50% of rent as an EXPECTED case. Your numbers are a best case analysis.

Here's reality. I just had one of my tenants bug out. This same property had the previous tenant bug out back in April. So, I had no rent for April, May, or December, and probably won't get any in January. I do have $1200 in retained security deposits for those four months, but that's much less than the $3800 I should have had in rent.

When this latest tenant moved out, they left the place messy. Not a disaster, but messy. They had repainted a bunch of the trim, then sloppily overpainted it white. So, a cleaning crew ($180), painter ($300), carpet cleaner ($145), and misc stuff I dealt with myself ($100). In this case, I had only a $400 security deposit because in this neighborhood its very difficult to find anyone who can pay the whole security deposit and a months rent. In this case, the tenants agreed to a higher rent in exchange for a smaller security deposit.

I've decided to try using a leasing agent to re-rent the place, rather than make 20 trips back and forth like the last time I filled a vacancy. That's another $475 once its filled.

Now, they actually left the place pretty clean. I've seen places left filled with trash, trashed carpets, trashed paint, and holes in the drywall. If that were to happen, the make ready costs could have easily been $3000 instead of the $725 they actually were.

Worst case is something like that drug deal in the thread I mentioned. A not so bad and entirely expected worse case would have been a lengthy eviction on top of a mess.

In your list you've included nothing for vacancy, and, unless you're very lucky, you will have vacancy. As some point you will have major expenses. Your $1000 a year may cover minor items, but realize that since you're far away, every little thing is $100 or more because you have to pay someone to go do it. For example, another tenant called and said the "water won't come out" in the shower. What?? Turned out it was a broken drain handle. $3 for the part an 90 minutes of my time, mostly driving, to fix it. For you, that's a service call to a plumber and $100. Eventually, you'll have to replace furnaces, roofs, sewer lines, and other high dollar items. If you own one rental for five years, maybe you avoid that. If you own 30 rentals, you can essentially count on several of those major items each and every year.

Even with the things you mention you're at $592. You're only $108 off the 50% mark, $1296 a year. That's one months vacancy in each unit of your duplex.