Analyze my Deal please!

[Michael Rodrigues]

Hi all, Looking at a 2nd rental property for cash flow and long term hold. I've found the following, please let me know what I may be missing as far as my numbers. In Utah: healthy market in this city with projected 4+% appreciation projected for next year. Also this city is in many top ten emerging city lists. But really I'm more concerned about cash flow than equity increase. Listing price: 259900 Duplex (2 units, each are 3 bed 2 bath) Current Rent: $1000/unit, $2000 total/mo 20% down, just under $52k down Estimated Mortgage 30yr @ 4% (est) = $1322/mo That is assuming: $3350 in property taxes and $600 ins. Current Property Manager = 8% gross monthly rent 100% occupied with potential to raise rent Monthly costs: $1322 debt payment $160 property manager $279 Property tax (would be a yearly payment in full) $50 insurance No HOA = $1811 Rent- $2000 potentially able to raise it to $2200 If I calculated the cap rate correctly it's around 6.8 Doesn't seem like great cash flow, right? Am I missing something? I know I can offer a lower purchase price. Thanks for the help. I know I need to look into the 50/2 rule as well, haven't done that yet. Still learning. The 2% rule, if I'm calculating it right, says I should be getting over 5k in monthly rent? Doesn't seem right? Or is this just really that bad of an investment? My other townhouse cost me $178k 5 years ago and currently rents at $1400. Again, the 2% rule seems like i should be getting much more in rent, but that is the current market rent for that size townhouse in that area. Similarly, if monthly rent is $2000, that means $1000 will be expenses outside of my mortgage. Which doesn't quite add up, seems like my expenses would be lower in this case. Thank you!!

[Adam S.]

Michael - I would factor in the following as a "cost."

 - Vacancy (percentage of your monthly cash flow saved for when you have a vacancy)

- CapEx (capital expenditure - money needed when something larger goes wrong. Roof, HVAC, etc)

- Utilities

- Property upkeep (grass cutting, etc)

I currently budget 7% for vacancy and 10% for CapEx on my rentals. The CapEx may seem high but the properties I'm invested in have a high probability of needing work (not the best area and slightly older).

At your current math (without vacancy or CapEx) you would cash flow $389/m (I used $2,200 as your rental income). It would take you 11 years of consistent rent to re-coup your down payment. I admit this doesn't factor in raising the rent as time goes by but you might want to factor that into your overall strategy. Is the property worth holding on to for that long before you see a true return on your money or are you confident that the appreciation/loan pay down will work out greatly in your favor in the same time frame.

I'm not in favor of the numbers presented but it really comes down to what your short term strategy, long term strategy, and appetite for risk are.

Good luck either way.  Please keep us in the loop as you move forward.

Thanks,

Adam