These Numbers Are Amazing. Am I Doing Something Wrong?

Question

Needing a second pair of eyes on this deal analysis!

I am in the market for my first deal and will be occupying one unit for a year or two to start. My goal is to buy and hold, and to cash flow even just a modest amount from the start. The New England market is, like all around the country, very much a sellers' market with low inventory. So this property perplexes me because the numbers are outstanding. What am I missing here?

I've been teaching myself 4-square analysis (from Brandon's YouTube) and learning to read the numbers. It's been interesting to see how the numbers tell a different story from the curbside appeal! I am running the numbers as if I were renting out the entire property, because that's the plan long-term.

Here are the figures:

$275k purchase price

total monthly income: $3350

total monthly expenses: $2732

total annual cash flow: $7416

total investment: $16,625

cash on cash return: 44%

THANKS!

Will Kenner · Answer

@Eliana F.

This is certainly an exciting property! Assuming the utilities, taxes, expenses, etc are all accurate, the numbers do look good. However, they look "too good" because they are factoring the best of two different worlds: a low FHA down payment as an owner-occupier, but full tenancy rental income as if it were a pure investment property. If you were having to do the 25%+ down for a conventional loan, your total investment would be $68k+ and not $16k, skewing the CoC and making it a whole different story.

As a long term play, starting out with house-hacking it initially though, it very well could makes sense. Living in one of the units (assuming unit 3) and renting the other 2 for maximum rent, your monthly income will drop to $2,600 which is below your estimated expenses. However, even with this deficit your living expenses will no doubt be far less than other options. Plus, you get the added benefit of using OPM to help build your equity from the rental income of the two other units! If there's one thing that's common with many of the success stories on BP, and that @Scott Trench of the BP money show always says, it's to House Hack and utilize that low down payment FHA loan!

Good luck!

Ben Zimmerman · Answer

@Eliana F.

I'm assuming you plan on living in the property for at least a year to fulfill the FHA requirements.

Otherwise I would double check your expense numbers to make sure they are realistic, specifically your property tax calculations.  I'm not from MA but a quick google search shows they have some of the highest property taxes in the nation at 1.17% annually for the state, plus any additional property tax levied by the city/county.  At 1.17% of price, I would think at minimum your property tax would be closer to 3,160 per year, plus whatever the county/city charges.

Also I would be skeptical about 200/month total for gas/elec/water/and sewer for a triplex.  I would assume that 3 people trying to heat their homes in the cold winters would cost a decent amount, plus 3 families showering every day for water etc.  Another quick google search shows MA pays some of the highest utility costs in the nation.

I've never had much luck with multifamily units having someone upkeep the lawn/snow removal for free.  It works fine in a single family unit, but in a multifamily it can sometimes be difficult to find a tenant that will actually do it.

Jared Logan · Answer

@Eliana F.

numbers look good but $2000 for rehab+misc. seems liberal. Unless it’s turnkey and ready to go now. I feel like i can almost always find more than $1k that needs repair.

Dennis Wayne · Answer

@Eliana F.

Probably a good buy for that area in this cycle but I would not call those numbers amazing considering the purchase price . Your expense calculations are likely way off and cashflow would be far less . Could be a deal though regardless

Eliana F. · Answer

Thanks @Ben Zimmerman! Yes, I'll be living in one unit to fulfill my first-time homebuyer loan requirements. I'm doing the analysis as if I weren't living in the unit because I plan to move out after a year or two.

I listed the property taxes as 525 monthly, which comes to 6,300 per year. I'm not sure what you mean by "closer to 3,160 per year"? Tax rate in the town is 22.36 for 2020 (yes, extremely high taxes).

Good point on adjusting utilities amounts. Yes, I will be paying for hot water for the property. The tenants will be paying to heat their units, so I will not be paying for that.

Lawn/snow plus property management I will be doing myself, which is why it's set at zero.

THANKS!

Eliana F. · Answer

Thanks @Jonathan Feliciano! I'll list the full analysis for more detail. I did include 5% cap ex, for instance.

The local rental market is very strong. The property is basic, no frills, but from the showing yesterday, there doesn't seem to be a lot of work to be done. Built in the 80s so no lead (a plus for families). Separate utilities.

Triplex:

unit 1: 3 beds, 1.5 bath, in-unit laundry, 2 parking spaces

unit 2: 3 beds, 1.5 bath, in-unit laundry, 2 parking spaces

unit 3: 1 bed 1 bath efficiency, 2 parking spaces

INCOME

Unit 1: 1300

Unit 2: 1300

Unit 3: 750

total monthly income: 3350

EXPENSES

mortgage: 1114

PMI: 228

home insur: 100

prop taxes: 525

water/sewer: 100

lawn/snow: 0

garbage: 100

elect: 50

gas: 50

vacancy (5% rent): 155

cap ex: 155

repairs: 155

prop. manage: 0

total monthly expenses: 2732

CASH FLOW

total monthly income - total monthly expenses = 618

annual: 7416

CASH ON CASH RETURN

down payment: 9625

closing: 5000

rehab: 1000

misc: 1000

total investment: 16,625

total annual cash flow - total investment x100 =

44.6% cash on cash return

Jonathan Feliciano · Answer

Those numbers look amazing!

However, I don't have enough info about the property to tell you if they're accurate or not (sorry).

I will tell you this though---look over your estimated income and expenses once more; those numbers do look good to be true!

I would suggest verifying your rental revenue using BP or Rentometer. Also, take into account the demand for renting in your area; you could have a great rental unit, but if there's no growing demand in your area, then that could make your home a liability. I'm not trying to discourage you; just saying make sure you consider these things as well.

Also, make sure you've included intangible expenses, i.e. capital expenditures or property management (even if you are managing the property yourself). It's common for most people to forget these expenses.

I hope I was able to bring you some insight. Keep asking around and see what others say! If you have any questions, feel free to reply to my thread. Have a great day! :)

These Numbers Are Amazing. Am I Doing Something Wrong?

Most Popular Reply