Am I overestimating my expenses?

Question

Hello, all! I'm new to real estate investing. I'm hoping to buy my first property--ideally, a house hack duplex in central Florida--within the next year. But I've been keeping an eye on the MLS for the last six or eight months, and none of the numbers look good. It may just be that I'm going to have to look for deals another way, but it's got me worried I'm doing something wrong in my initial estimates.

Here's how I'm calculating my estimates, using a current duplex on the market as an example. I'd say this is a B neighborhood. These are some of the better numbers I've seen in my area, but it's obviously a non-starter if my estimates are reasonable. Are they?

Asking Price: $125,000

Gross Scheduled Income: $15,900/year

Less 5% Vacancy: $795

Operating Income: $15,105

Less Operating Expenses: $7,630

Insurance (1% of purchase price): $1,250

Property Taxes: $815

Management Fees (10% of scheduled income): $1,590

Repairs and Maintenance (5%): $795

CapEx (10%): $1,590

Misc. (10%): $1,590

Net Operating Income: $7,475

Less Debt Service: $681/month, $8,172/year (assuming a 5% down payment on a 4.5% mortgage, with .8% PMI)

Cash Flow: -$58/month, -$697/year

John Leavelle · Answer

Howdy @Brian HamiltonFind you a good “investor friendly “ Realtor. They can find deals better than you can at this point. They usually have access to off market deals too. They also can run a CMA (Comparative Market Analysis) to help you establish a good offer price as compared to the asking price. The same goes for Market rent rates.

James Masotti · Answer

Looks like your numbers are pretty accurate...if anything a tad under what I'd underwrite my properties for...but I tend to be in more of a B- neighborhood. Haven't done the full math but your debt service will drop about $25 a month for every $5,000 you bring off the price. You will go positive at $110,000....but barely...get the number down to $95-100k and then you've got a property....As you mentioned you're searching the MLS...many of the good deals there get picked over really fast...especially when the market it hot like it is now. People are more willing to park 20% down payment into a property and take a 4% return on their money because it's "safe"

Brian Hamilton · Answer

Thanks for the quick replies!The stated income is for both sides; I'm running the numbers as if I wouldn't be living there. I'd also plan to manage the property myself for at least as long as I live in the building, but the advice I've heard has been to make sure the numbers work even if I had to pay for management. Is that right, or is that being too conservative for a house hack?As for "misc.," I have in mind the kinds of things Jon is mentioning--turnover costs, cleaning fees after turnover, tax and legal help, lawn care. I'd plan to get more specific about those if I found a particular place that seemed in the ballpark.

Jason D. · Answer

So two questions, is the stated income for one side or two? And the 10% for "misc. expenses" is for what? I think you can take that off unless you have specific expenses that you are lumping together.

Jon Holdman · Answer

Examples of "misc" - lost rent during turnovers, an eviction, or a discount to get a tenant in (economic vacancy). Legal fees. Accountant fees. City licenses.I'd agree, thought, about a PM. If you're house hacking, manage it yourself.

Jon Holdman · Answer

Is the $15,900 for both sides? Even though you'll be living in one, I'd do the analysis assuming both sides are tenant occupied. Then the difference between your cash flow with both sides rented and your cash flow with you living in one side is the cost of your own housing.Assuming that's the rent for both sides, you're in the right ball park. Your PM fees are probably low because there will be additional fees for each turnover. Some even charge for renewing leases. Repairs, capital and misc stuff is VERY lumpy. You may have years where you have none of those expense and then have some big bill, like a sewer line or a lengthy eviction.

Jason Howell · Answer

Just out of curiosity: If its a house hack, would you still have a property manager for the other unit or would you be managing that yourself? If that latter, that saves you a good chunk of change. I suppose down the line, were you to move out and rent that second space, you might be more inclined to THEN get a property manager and you'd be in this predicament then so maybe that doesn't help in the long run. then.Also, what is your "Misc" category? You are already accounting for repairs and CapEX... not understanding why an additional 10% would need to come out.