Would you do this deal?

Question

This property is a duplex in a college area with good rental history (not college kids)

Purchase price $125,000

Rent $1850

Electricity $25

Water/Sewer $100

Insurance$100

Heating $150

Vacancy (5%) $92.50

Maintenance (5%) $92.50

CapEx (5%) $92.50

Prop. Management (10%) $185

Mortgage Payment $496.13

Taxes $280.83

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Income $1850 - Expenses $1614.47 = $235.53 cash flow

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Total cash needed $37,645

Cash on Cash = 7.51%

Cap Rate = 7.02

Ben Wilkins · Answer

@Kevin Rollins - In response to @Timothy Doenges concern about "safety net", I'm happy to see that your initial analysis included CapEx, Maintenance, and Vacancy. Quite a few newer investors forget to include these as "expenses", and you show that you've done some research (kudos!)

The percentages that you used seem low (only 5% for both maintenance and CapEx) - I would only use this low of an estimate if it was a new property. You can't exactly plan for an emergency CapEx expenditure (new roof, water heater failure, etc), but most properties should assume 10% maintenance and 10% CapEx - especially if this is your first property and you have no other possible funds to pull from for repairs.

If you increase both of these percentages to 10% you'll be closer to $120 monthly cash flow (estimating, I didn't do the math). At this point, you've covered the concern of repairs and can see that this investment probably isn't worth it from a cash flow perspective.

Overall, you did a good initial analysis - now you're at the point of refining and deciding what to do with the knowledge. Try to make your first property a solid one, or you'll run a higher risk of regrets if anything goes wrong.

Kevin Rollins · Answer

Both units have tenants. Both have been there for over a year. They were on a lease, but are now month to month. I spoke to one of the tenants during the walk through. He indicated that they would like to be there for at least another year.

Although the units are three bedrooms each, both are being rented by young couples with 1 child.

The rent is a little below market, but I would likely not try to change the rent immediately on these tenants. I'd rather have good tenants than make a couple of extra bucks than to lose money on the other end with poor tenants.

Jay Helms · Answer

Does the deal fit your investing criteria and will acquiring it help achieve your REI goals? If yes to both of those @Kevin Rollins, then DO IT!

Michael Volek · Answer

Hi @Kevin Rollins, by your numbers I assume you're using a conventional 20% down loan. Maybe you could speak with your bank and put down a little less? This will affect your ROI. Maybe even try to convince them to agree to sellers financing. Sometimes sellers will agree to that because they want more money in the long run, and no doubt they would make more through the interest you pay. It's worth finding out. You can find out more from @Brandon Turner's Low and No Money Down book, if you haven't read it already.

I agree with @Ben Wilkins about your maintenance and CapEx numbers. They do seem a little low but I don't know the condition of the duplex. If it were a new building, like he said, then I don't have to repeat it. If it's not new, and I'm curious no one has suggested this yet, but maybe consider sprucing the units up yourself. You can do wonders to a property by painting it, replacing carpet/buffing floors, staining or painting cabinets, etc all by yourself. None of this is outside ANYONE'S abilities, trust me on this. With YouTube, it's such a simple process, that's why you only pay $10-$15/hr for the labor. You would stretch your hard earned dollar and earn a nice return on it. You could increase the rent by $100/mo from this alone, which dramatically improves your investment. Combine this with having the renters pay for utilities and it's even better.

This brings me to my next point. Never, ever, ever be afraid of raising the rent if you feel it is justified. I'll tell you now, the renters you have now are NOT the best renters you will have. You haven't upped your experience with attracting quality tenants, and most bad tenants will be repelled through a proper tenant screening process. Truth be told, a better property will attract better tenants. Raising rents isn't a deal breaker for a lot of tenants, but if it is, you opened the door to attract a better tenant.

My last thing is this: you budgeted for property management, and that's fantastic. If you don't own any other properties, why not manage yourself for a year and collect that money? I mean still budget for it, but just pay yourself. You'll collect invaluable hands on experience and clear up some extra $$$ should any repairs be needed. Managing properties isn't difficult either. It's actually pretty simple once you know what you're doing. You can check out the Book on Managing Rental Properties, yet again by Brandon and his wife, Heather Turner, also full of invaluable information.

There's some pretty narrow-minded individuals on here that will try to give good advice, but maybe aren't the best to learn from. I would like you to re-run the numbers with all of this information and post what the new cash flow and ROI would be. Let's see if this is, in fact, a good deal or not. I look forward to the results. Good luck.

-Michael Volek

Kevin Rollins · Answer

I dumped my numbers into the BP calculator and it pumped out the 7.02 Cap Rate. Any thoughts on what I might be doing wrong? I'm doing a lot of research, reading and listening, but I'm still a newbie and open to any blunt advice that's out there.

Thanks

Bruno Martinez · Answer

[Duplicate post]

Bruno Martinez · Answer

How in the hell, are you getting a 7% cap rate? Cap rate on this is closer to 2%. You're playing a dangerous game here...

I wouldn't purchase this. Then again I am seeking cash flow, not equity. Im assuming if you're making such a "small" purchase you might be after cashflow also?

If you still thought its worth it, I would try and pass on the costs of utilities between the rental units like Timothy said.

Ultimately, I would be pissed off at the thought that all that time spent managing these units would only net me $2,800 cash flow a year... thats absurd!! Even basic repairs can easily wipe a whole year's worth of income/cashflow/profit. Let's not even talk about a roof repair. I mean even new paint for the exterior would set you back 1-2 years worth of income. So would: re-carpeting, Interior paint, set of new appliances, set of new windows, I mean, the list is endless. A basic handyman call would cost you 15 days worth of rent... and thats just the appointment, not the materials, and further labor involved.

I'll keep it real, pass this sh*t deal up. lol Leave it for someone who wants to collect equity over cash flow. If that is you, good, I hope you have other and enough assets to cover repairs and maintenance.

However, I'll play devil's advocate... If I could have individual investments that would guarantee me a cash flow of 235 a month, how many would I have?  As many as I could get my hands on...

My honest opinion is that its a bad deal unless you already have a substantial portfolio of properties which provide you with steady (individually small, but large as a group) cashflow, and you're looking to continue building wealth through equity building.

Would you do this deal?

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