Originally posted by Patrick McGowen:
I have not looked at Great Falls market specifically, but am familiar with Montana (Bozeman mostly). Your numbers look good to me. Two numbers might be low:
I would guess insurance to be 1200-1500. You can lower this with a higher deductible if you have cash reserves.
Your utilities could be closer to $3,000. Find out what renters pay and what is your responsibility and you should be able lock numbers down for what you are responsible (water/sewer, garbage, electricity…)
To have positive cash flow with no money down is awesome. Looks like you have about 300/month. Your cash on cash return is infinity! Here are my recommendations to you:
Lock down all these numbers before you close (the previous property manager should be able to get you costs on utilities for example). I would also get verification on actual rents collected over the last year. The two numbers that are most difficult to estimate are vacancy and repairs.
Repairs: You have good number, but get a good inspection to make sure there is not a lot of deferred maintenance.
Vacancy rates: You should be able to get historic vacancy rates from property manager. Also you can look at census data for Great Falls area for 2010 rental vacancy rates. In my opinion, the best hedge against vacancy is cash flow. An urban area like Great Falls you never have to have vacancy with a good property manager and willingness to reduce rents. So the real risk is what happens when you reduce rents. In my opinion, the best hedge against vacancy is cash flow. Right now it looks like you could reduce rents by $75/month/unit and hold the property indefinitely. Could you survive a 20% reduction in rent? If you had to drop rents from $1000/unit to $800/unit to keep them occupied, that would shift your +$300/mo to -$500/mo. Inflation will eventually catch your rents up, but you need to be able to survive potential down turns. My main point is, this looks like a good deal, but HAVE CASH RESERVES
Good luck
Thank you so much for the thorough response Patrick!! It's great to have someone also from Montana take a look at it since this is definitely not the most popular real estate investing market.
Totally agree on nailing down the utilities. I'm in the process of getting ahold of the actual data of what water has cost the property in the past. Also I'm almost sure that at least 3 of the 4 units pay their own gas & electricity. I will update my spreadsheet as I get more solid information.
Also agree on nailing down a more definite insurance premium. I'm actually planning on making some phone calls today to get some quotes.
How much do you like to keep in cash reserves? This will be my first purely investment property, but my initial idea was to have enough to cover 12 PITI mortgage payments.
Thanks again, and enjoy whatever autumn you may get down in Belgrade. Winter is quickly arriving!
Dave
