Checking Numbers on First Investment Property, Would you do it?

[Dimitri Metropulos]

I am new to investing and am looking for my first deal.  I think that I have found a good multifamily property with 2 units both of which are occupied currently.  Both of the tenants have been there for a long time and look to be taking very good care of the property.  I am a little hesitant, but very excited to make my first deal and want to ask you (the experts) if you would invest in this property given the numbers I have. The loan would be for $82,500 over 30 years.

Purchase Price: $110,000

Down Payment: $27,500

Gross Monthly Income: $1,525

Expenses: $815 monthly

-Mortgage $415

-Property Tax $136

-Insurance $35

-Vacancy $152.50 (10%)

-Repairs $76.25 (5%)

Net Monthly Income: $710 or $8,520 a year.

The Cap Rate = $13,500/$110,000 = 12.27% *note I did not include the mortgage expense of $415 in my calculation.*

Cash on Cash Return = $8,520/$27,500= 30.98%

With that basic math I see positive cash flow of $8,520 which would pay off my loan in about 9.6 years which I think is a pretty good number. Should I be looking for a more aggressive ROI? Am I missing anything in my calculations? If it were your first property would you do it? What are the margins you look for in your investment properties?

Thank you in advance for all of the help!

[Joe P.]

My initial thoughts:

• You are not accounting for closing costs. I am about to purchase a property for ~103k and my closing costs are 5k. You should account for this.
• Your insurance cost per month is dangerously low. I don't know any property, 100% tenant occupied, that would be less than 600-700 per year, or closer to 50-60 per month.
• Do you really think 76.25 per month stashed away will pay for CAPEX/maintenance? Because I think that is also a tough assumption. If you saved 76.25 per month for 5 years straight, that amounts to $4,575. What if you need a new roof? I bet that entire 5 year reserve is gone in one fell swoop.
• You did not account for any other expenses, e.g. water/sewer/trash. Most municipalities require owners to pay for this, so I'm curious to know if that's a part of the rent income or just omitted? Also consider gas/electric as well.
• We don't know the overall quality of the property (back to CAPEX) and the neighborhood (if this is a good deal).

My approach in these is pretty conservative, but I see some gaps that might bite you in the end. If you have extensive contracting experience and are not concerned about plumbing, electrical, roofing, or maintenance issues, perhaps the values make sense.

Curious to see what other folks think -- I'm looking it at this from a high-level spreadsheet mentality.