All Forum Posts by: Ron Averill

Thanks John and Bill. These are good points and helpful advice.

It seems I did not provide enough information in my initial post, so here are the gory details on the duplex:

Asking price: $200k

Assumed down payment of $50k

Financing $150k at 5% (approximate) gives a monthly P&I of $989.93.

Current rent per unit is $975 each. Market rent (based on comp's) is $1200 - $1350. I think this property should be in the $1275-$1300 range. But it will take some time to ramp up to this.

Assuming 95% vacancy and 95% non-payment rates, total actual income is: $21,118.

Estimated Operation Expenses: $8,695 (taxes, insurance, maintenance)

Estimated Financing Expenses: $11,879

Based on the above data, the COC is 0.99%

A five-year average ROI that includes equity buildup is: 10.06%

The above neglects rent increases and value increases.

Also, the seller may be willing to finance the deal.

I have not started the negotiation process yet, so some of these numbers will probably change a bit.

I'm struggling with the definition of a reasonable target rate of return and cash flow. Both of these seem low to me on this deal. I'd like to have something in mind before I begin negotiating.

Thanks,

Ron

I am considering the purchase of a duplex (my first rental purchase).

I have run all of the numbers on it, and found the following.

Based on current rental income and asking price, the cash-on-cash return is about 1%. In other words, this property barely breaks even.

But the current tenants are being charged rent at well below current market rates. I believe this is because the current owner is an elderly lady who lives several hundred miles away, and she is happy to keep the current tenants at below market rates. In other words, no hassle with finding new tenants.

If I re-run the numbers with market rate rents, the cash-on-cash return is about 11.8%. Does this sound reasonable?

My bigger question is this. If I buy the property and start raising the rents (even gradually), I will probably lose the current tenants. Would you buy the property under these circumstances?

The property is in a desirable neighborhood with a strong overall rental demand.

Thanks for your advice,

Ron