Ready to pull the trigger - should I?

Question

Hi all, found a property I'm close to ready to moving on. Seller and I are about 4k apart in purchase price but I'm using their selling price for number eval:

Neighborhood: C+/B-, I would live here if I needed to. Its a quaint older town near public transportation and very close to a bridge into Philadelphia. Buying for cash flow, I don't expect much appreciation in the area.

Property: Basic property, seems to be in very good shape. Won't need anything for a bit but I will check with the inspector. CAPEX is set to 10% just in case.

Purchase Price: @125,000, Cash down is 25% (31,250), assuming 5% in closing costs ($4,687.50), 30 year fixed mortgage @ 4.5%.

Income: Rents 2 units (a 3 bedroom and 2 bedroom) for $1060 per month, each. I think this is low for the area; the 3 bedroom should be 1200 per month. But lets assume we don't change this - $2120 per month in income.

Monthly Expenses:

• Mortgage:  479
• Insurance:  80
• Taxes:  349.67
• CAPEX (10% of rent):  212
• Vacancy (8% of rent):  169
• Maintenance (8% of rent):  169
• Heating:  89
• Electric:  59
• Water:  89
• Property Management (10% of rent):  212 (I am managing it for the foreseeable future)

Income - Expenses = Cash Flow

2120 - 1908.87 = 211.13 per month, 105.57 per door. If I keep the property management for reinvesting, cash flow is actually $423.13 per month.

COCR: 7.05%

Cap Rate: 20.35%

Am I missing anything? Seems like a solid deal for cash flow and if I can improve rent to 1200 for the  3 bedroom, 2260, its even better.

Scott Skinger · Answer

Agree with @Alexander Felice, at some point you just need to pull the trigger and learn from your first investment.

Regarding CoC and returns in general, I try to do the following:

CoC - 10% or greater

Overall Return - 15% or greater

And I think about the "real world" numbers outside of a spreadsheet. It is easy to get caught up in a spreadsheet and the excitement of buying the property but I also try to consider the following:

-Is my return greater that what I could receive investing in the stock market or an apartment syndication deal?

-how active or passive do I want to be in this investment? Will I learn something from this investment?

-a 10% CoC return in a spreadsheet is great but is the $200/month or $2400/year worth the effort I'm putting in? In other words "Is the juice worth the squeeze?"

Only you can answer these questions for yourself but I like to evaluate the investment inside and outside of the spreadsheet.

Good Luck!

Alexander Felice · Answer

quick reply

- look, this isnt' the deal of the century, but that's ok. For most beginners, you're not gonna get a chance at the deal of the century, what you need is a deal that works, so you can get better.

This deal will fit that criteria. It's not great, but it's certainly good enough.

there are things I don't like about this deal, as mentioned already: paying for utilities.

The numbers seem good. You're being super conservative in U/W (which is what I do) but real world financials will probably reward you far better. Remember to stay tight on the first few, keep reserves high as possible until you get a feel for future expense rates.

Fact is, you could search for a deal that makes you $500-1000 more per year.....why bother. Close this one, you're not buying your retirement you're just busting your first nut so get it done so you can get to closing the next one.

Account Closed · Answer

@Joe Papp I wouldn't fudge your numbers just to get a better COC. They are what they are. I run numbers similar to yours. I figure I'm accounting for prop mgt so if I'm not using it, then I get a better/faster return early on.

Thomas S. · Answer

I personally never touch a property with utilities included in rent. Tenants can eat up your cash flow very quickly out of spite. I would run away from this property for that reason alone. Add to that the low ROI and this is definatly not a good investment.

If you want cash flow this is not the one unless you can increase rents drastically however you still risk one bad tenant destroying your returns.

Utilities included should always be avoided.

Joe P. · Answer

Hi @Casity Kao, nice to hear from you again! I think you've commented on some of my other threads.

You are correct, this is an inclusive lease. The current owner is paying for water/sewer, common electric, heating (shared furnace at a locked temp for 2 units). I believe I could transfer some of these costs to the tenants in the form of a rent increase when their leases are up. Since the expenses are shared/common, its difficult to pass those along to tenants, but I do think an increase is in order given the area, comparable rents, and quality of the units.

You are also correct in that I am trying for extremely conservative numbers (I think we all should - that way good deals are going to be present and we still account for the bad stuff), but I should make something very clear -- I don't see much appreciation on this property looking at the history of the town. It is in NJ, not Philly, PA proper, even though its technically only 10 minutes away from Philly. Looking at the history of the town I don't see many wild swings, but if it does appreciate, that's just an added benefit.

My CAPEX is set to 10% because both the roof and furnace are 12 years old. I imagine in the next 8 years, I expect some failure on one or both of the units based on typical longevity. Lets assume in 5 years, one fails -- I have accumulated $13,500 for that expense based on current rent values. I think that's about right, albeit slightly conservative.

You make a great point regarding COCR - what is a better number? Closer to 10%? 12%? Raising the rent to 2260 per month as expected with the 3 bedroom brings my COCR to 10%, with as you said, conservative numbers...

Joe P. · Answer

Bingo - I'm accounting for it but I'll get a better/faster return early on, as I don't plan on hiring a management company anytime soon. But the numbers still work to $200 per month net cash flow even with the management company.

Ben Wilkins · Answer

@Joe Papp - I personally 100% agree with a safe margin for both CapEx and Maintenance, and (almost) always use 10% in my evaluations. Only a new construction or other extenuating factor would make me lower those values - I would rather have a hefty account set aside for big-ticket items than to pay for a new roof out of what I thought was my profit.

I would usually balk at paying heat, especially since some of my tenants like to keep their apartments at 90 degrees (not a joke actually - I just about had heat stroke when walking into a unit last month).

You are correct about a clause in the lease - I put that in for water, stating that the landlord agrees to pay the water bill up to a certain amount and gives me the ability to charge for anything abnormal. I've never had to actually charge extra, but heating is a different story.

For a first investment, you have some fairly good numbers. Have a inspector walk through the property with you, and pull the trigger.

Steven Gesis · Answer

Not bad, great rents! If you can get the $1,200 - that would be a big boost!

Ready to pull the trigger - should I?

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