Return on cash on lower risk apartments
Hello guys,
I want to buy my first 4-8 plex to diversify my investment portfolio. Want an income producing hard asset to hedge against the stock market as most of my investments are in the market. I'm 35 years old and just getting started at this.
I've done my research and understand the 50% rule, cash on cash, noi, irr, annualized yields etc. I understand class a, b, c, and d apartments.
I've looked into just joining a crowdfunding site like realtymoghul... not sure about it.
One thing I've noticed is that the cash on cash on a lot of the realtymoghul investments is 7-10%. IRR is 15%. I think I can beat that if I just buy my own complex.
I was reading that the goal should be 15% cash on cash unless it's a rapidly appreciating market... then goal could be 10%. This is much higher than properties listed on realty moghul.
I can't find much here in hampton roads. have a lead on a 4 plex that was just put on the market for 395k. its class b and just renovated. 3 bedroom/1 bath 1000 sq foot units. Its in a very desirable area of town and would attract professionals. Many large homes mixed in with homes converted into high end apartments. Better appreciation because in a nicer/desirable area.
Let's say I get it for 350k. Mortage would be 21600/year if give 20% down (70k). 10k for lawn/property tax/insurance. lets say 4000k maintenence/year. lets say property mgt takes 6% of rent. Assume 5% vacancy. Figuring out the rent needed to get 15% cash on cash is simple algebra.
15% of 70k downpayment = 10,500
rent = r
r - (21600 + 10000 + 4000 +.06r) = 10,500
.94 r = 46100
r = 49042.. 48 rent payments a year. since assuming 5% vacancy need to generate this much from 45.6 payments (5% of 28 is 2.4).
49042/45.6 = 1075/month rent per unit.
Before renovation they were getting 1000/month with utilities. After upgrade they are estimating 1200 month rent including utilities... Doing a zillow search comparables are advertising for 1200-1300/month so this isn't unreasonable.
Utilities is almost 250/month! So they are acutally only estimating 1200-250 = 950/month for pure rent. Clearly this does not meet the 15% cash on cash threshold. The actually cash on cash is:
57600 (total rent) - 10000 (lawn, property tax insurance)-4000 maintenence-12000 utllities - 3456 mgt fees- 21600 (mortgage = 6544 profit per year.
6544/70000 = 9.35% cash on cash if I get at 350k.
Of note: using 50% rule = 57600 rent/2 = 28800.
28800-21600 = 7200 profit... this doesn't include added expense of utilities... with utilities the cash on cash is actually negative (utilities is 12k/year).
Does 50% rule include utilities as an expense? Very important to know.
So lets says we assume the actually calculation is correct and the expected cash on cash is only 9.35%. Is that so bad? it's in line with realty moghul. You guys talk about 20, 25% cash on cash but that seems like higher risk class c and d investments with unreliable clientele and the need for lots of upfront remodeling costs. Isn't a 9.35% cash on cash not so bad for safe investment with reliable renters, best in town location, and higher appreciation potential?
Thanks