Charleston, SC · Member since 2017 · 16 posts · 3 votes
Hi BP Members,
I hope you're well. I'm analyzing a property for purchase and the cap rate is 5.73% and cash on cash ROI is 5.07%. The monthly cash flow is $291.46 total for the duplex. While I think the rent could be increased $75 or so per side in the future, one of the units is in a 2 year lease. Purchase price would be $295,000 and would be putting 20% down, as I couldn't find any options for less down with an investment property. Note, this includes 10% for property management as well. The numbers would be nicer if I self-managed, but don't live local to the area.
What are your thoughts regarding the lower cap rate and cash on cash ROI versus yielding >$100/door, which this is currently doing? Most other information I've read indicates not buying for less than a cap rate of 7% and hopefully cash on cash of at least 10-12%.
Investor · CT · Member since 2019 · 67 posts · 15 votes
6y
For me I think cash on cash is most important. If you’re happy with a 5% return then go for it. Also, as you pay off the loan the cash on cash should improve.
I personally would like to have both a positive cash flow ($100/unit for multi unit properties) and a COC of at least 12%. I would like to earn more than I would get by investing in stocks.
Rental Property Investor · Charleston County, SC · Member since 2014 · 42 posts · 15 votes
6y
Hi Josh, Is the property located in Charleston County? I think you can do much better than that (8% to 12% cash-on-cash) with more upfront equity, although it depends on the area. Just my opinion, feel free to shoot me a message to help.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
I wouldn't do a deal with this kind of return, @Josh Corriveau. I also think your vacancy rate is unreasonable. A 1% vacancy rate basically assumes your tenants will stay for 16+ years. I recommend 8% to start and then adjust depending on your local conditions.
I'd also bump up CapEx and Repairs to 15% combined.
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
6y
@Josh Corriveau
Are those numbers accurate? For taxes, garbage, water & sewer, those need to be exact and not estimates. Also, what condition is the place in? Those might be all good numbers (except your vacancy rate) if things like the roof and hvac and appliances are all newer. I have a duplex with brand new hvac, so I use 5% maintenance and 5% capex on that one. On another one, I use a higher reserve rate, as things will need to be replaced sooner.
Charleston, SC · Member since 2017 · 16 posts · 3 votes
6y
Hi @Anthony Wick, thank you for your feedback. Yes, the numbers I included were as accurate as possible, based upon what the current owner pays, as well as projected taxes for the area at the non-primary (investment) tax rate. The property is in fine condition, but will likely need a roof and HVAC in the next 5-10 years. With regard to the interior condition, it's reasonably nice for a college rental.
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
6y
Hey Josh- Real estate is hyper local and returns are personal. Every market and investor is different; I understand you asking if the returns are acceptable, but if they are acceptable for YOU, then the deal is a good one- you have a completely different financial situation, background and experience than anyone else on BP, their thoughts on how something impacts your financial situation are irrelevant (no offense to any commenters here). I'd be willing to bet that every deal I've ever done would be torn apart in these forums and I quit my day job two years ago thanks to those deals.
On a separate note, I highly recommend against using CAP rates to evaluate residential properties. Values are calculated completely differently and CAPs don't give you the true market value of a residential rental property.
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
6y
@Josh Corriveau
As a follow up, you have a 30 year fixed rate mortgage at 4.6%. Are you preapproved for this? My last loan was indeed 4.6%, but it was a 25 year amort on a 10 year balloon. Between that and your tiny vacancy rate I think this deal could die on the vine. It’s not a “bad” deal necessarily, but it isn’t even a no brainer single. If one thing goes wrong early, your profits are gone. Any chance the seller would buy a 12 month home owners warranty for you? Gives you a chance to build up those reserves for a year.
Yes, I'm preapproved for the 30 year (though I think closer to 4.875 now). Regarding vacancy rate, I placed on the lower side since it's a college rental and traditionally leases in the area end on May 31 and new leases start on June 1 (or June/July similarly). I agree it's not a home run property and the margins are very tight. Any other ideas (in addition to the great warranty idea) that could potentially improve the deal?
San Antonio, TX · Member since 2019 · 930 posts · 836 votes
6y
Also, if your property manager charges a base rate of 10%, don't forget to account for the new tenant placement costs. A full month's rent would average out to about 4% extra a year.