Is this "Portfolio" a good deal?

Question

Hi Everyone!
I'm a first time investor, looking to gain some wisdom and experience in the market. Any criticism or help would be greatly appreciated, and I thank you in advance.

The Property "Portfolio" consists of 3 Duplexes, all located in vicinity to each other

Total Deal: $395,000
25% Down, 5.5% Interest 360 Months
$98750 Down
Mortgage Payments: $1682.07

Duplex 1:
$120,000
2 Bd 2 Bath: 675/month
2 Bd 2 Bath: 675/month
Tax: $2280
Total Rent: $1350
Auditor Value: $130,000

Duplex 2:
$135,000
2 Bd 2 Bath: 550/month (25 Yr Tenant)
2 Bd 2 Bath: 660/month (Long Term Lease)
Tax: $2670
Total Rent: $1210
Auditor: $130,000

Duplex 3:
$140,000
3 Bd 2 Bath: 676/month (subsidized, Long term)
2 Bd 2 Bath: 675/month
Tax: $2300
Total Rent: $1350
Auditor Value: $154,000

Gross Rent: 3910/month*12= 46920

Expenses:
Tax: $7250
5% Un-occupancy (On two duplexes): $1620
Misc. Repairs ($1200 Per Duplex*Tenants Maintain Exterior): $3600
= $12470

34450 NOI/ 395,000= 8.7% CAP

34450 NOI-20185 Mortgage= $14265 Cash Flow, or $1189 a month

14265/98750= 14.4% Return

I've been looking for quite a while, but I want to know if this is a good deal. Is there an flawed calculation, or am I missing anything?

Any help would greatly be appreciated. The seller is also considering selling the properties separately, at the above prices. Should I do the combo deal, or pick and choose?

Thanks for your time in advance.

Mike McKinzie · Answer

Your actual cap rate is going to be somewhere around 6%. Most studies show that all expenses are going to be around 50% of MARKET RENTS. You posted $46,920 as 'collectable market rents.' 50% of that is $23,460. That 50% not only includes taxes, insurance, repairs, utilities, it also includes vacancy, eviction costs, management (if you manage, your time is worth money), etc... Bryan Hancock posted a very large study of over 1,000,000 units, mostly larger apartment units that included income from laundry rooms, vending machines, etc... and the total expenses came to 49.98% of Gross Scheduled Rents. $23,460/$395,000 comes to 5.94% Cap Rate. A minimum of 10% Cap rate would dictate a price of around $235,000. As others have posted, you need to be able to pick these up for under $250,000 for a decent return and under $200,000 for a good return.

Michael Lauther · Answer

Logan, the 2% 50% guide is an excellent starting point when evaluating a property. On lower priced SF properties it generates a %12 return. for example a 25,000 property that rents for 2% 500 monthly would have expenses of 50% = $250 and a profit of $250. This translates to $3000 annual profit and 12% return on your $25,000 investment. My strategy is to buy cash and hold for income. if I cant buy a property that meets this criteria, I pass. Others look for appreciation in markets that are set to appreciate because of demographic factors like population increases and home prices that have collapsed because of the bursting real estate bubble. It appears that your properties are in Ohio (I am invested in Dayton) My strategy in Dayton is to buy and hold because Invest for income not appreciation. (although I would like some) Dayton is losing population and has the highest vacancy rate in Ohio but this has caused investors to exit this market and has left home values devastated. This is where I find opportunity to buy rehab and rent and in some cases can earn up to 20% or more on my cash investment. Currently have an offer for $7K on a property that will take $10k to bring it to pristine rental condition and will rent for $550 monthly. Already have a qualified tenant lined up. this will generate over 19% on my invested cash.

Logan D · Answer

Max and Michael. Thanks so much for the help. Those estimates were auditor values, and I agree they seem a tad bit over priced. I decided to scrap the deal, and realized not much potential existed, thanks to you help. I've been looking more around the neighborhood and have found smaller houses and such nearing the 40-50k prices as Michael had stated. Should I have any qualms going into houses versus condos/duplexes?

Max Drizin · Answer

With the cap rate that low, it's just hard to come by a good way to work on the deal. If you push higher rents, you'll get higher vacancy, which drives your income back down. At the same time, if you are buying all three properties, you should be getting it cheaper than buying them separately. If you could drop the price significantly, by 35-50k, this might be better. On the other hand, you might be able to get yourself some better terms. All in all, this deal doesn't seem that good, where it is now. I'm not sure what you mean by auditor exactly, whether you are talking appraisal or assessment. If it's a tax auditor, the numbers are completely worthless. Those people have no idea what they are doing besides trying to get the government as much money as possible. If those are appraisal values, done by a fair and unbiased source in current market conditions with good comps, then I would be a bit more safe with the numbers. Are the prices in your area comparable to these, higher, or lower? Sites like zillow and trulia can be helpful, even though they are often wrong. I wouldn't place any stock in their "zestimates" and whatnot but they do have good data aggregation, and it's a good place to get an understanding of an area or a property.

Logan D · Answer

Michael, thanks for the quick response. Unfortunately, in my surrounding areas, a majority rentals/condos/duplexes are priced based on both cashflow and a higher land value, due to the increase in new builds in the area. I've been looking for units in that price range, but I haven't really seen any on the market that weren't up for auction or such. The rent on these units can be pushed to 700-750, but I may have to look for some new tenants. Any thoughts?

Michael R. · Answer

The purchase price per property is too high for me given the rents you posted. I would pay max 45k for similar rents in my area. Now I dont know what area these are in but from a cash flow perspective I think you can do much better.