BiggerPockets

Need some insight from the tried and true movers and shakers here. Carlton Sheets need not apply.

Side-by-side Duplex built in 2006. Market rent of $650/side. Purchase price of $50,000 and max rehab of $3,000. Bank will do the deal at 15% down and 10 year fixed 6.5%. This puts me out of pocket $7500 + $3000 rehab with a debt service of 482.58/month. Property Tax is $2300/year, insurance shoudl be around $2000 (thanks Katrina).

Using the 2% rule, max purchase price is $65,000 so I'm definitely in the clear there.

Using the 50% rule, monthly operating expense should average $650/month over the long term.

Numbers:

Revenue: $1300
Expense: ( 650)
Net: 650
Debt Service:( 482)
Cashflow 168/month

I'll have official comps from my realtor here shortly, but we're expecting the comps to come in at around $75k.

Cash-on-Cash: $2,016/10,500 = 19.2%

Would you do this deal?

1. Max rehab of $3K? There is no such thing, in my opinion, of a $3K rehab in a single family much less a multi-family. When your buying an investment property, your not just replacing broken items, your, in fact, fixing future problems which will mitigate future expenses. In a multi-family, you have double the fixtures, appliances, doors, HVAC, etc.... this means you have double the reason to mitigate future expenses and you will undoubtedly spend much more money than $3K...... or wish you had.

2. Seems to me your much more focused on the 50% rule and CoC which can be a poor metric. The 50% rule is a guideline and, in my opinion, you need to look at mitigating future expenses by addressing those things that are at the end of their useful life. By doing so, you will increase your out of pocket, but decrease your expenses and your vacancies.

3. Using a CoC calculation when you have fixed costs and/or a fixed rate of return. When investing as a principal in an investment property, your expenses and revenues will never be fixed. Therefore, using a CoC calculation is merely another guideline at best. A CoC calculation would be a much better metric if your were the lender loaning to another investor with a fixed APR.

4. I would much rather you utilize a CAP rate and a return on investment (ROI) based on full capitalization and expenses. Since I do not have your full list of expenses, it would be hard for me to put a ROI analysis.

5. You need a benchmark! After you calculate the CAP rate, you can use comparables to make sure your paying a similar rate. With a ROI calculation, you can compare the return against other investment choices like treasuries or bonds, or loaning the money to another investor also know as opportunity costs.

However, based on your initial analysis using the CoC and the rules, it looks like a deal worth looking into in my opinion.

Good Luck!

Thanks, as far as the $3k max rehab, the units as is are rent ready. From what I can tell the units are pretty hardened for long term abuse. The only thing these units need are carpet in two bedrooms (the rest of the unit is tile) and some touch up paint. These were built in 2006 during the post-katrina real estate boom and it looks like someone had close to $175,000 into the property and when the market went bust, they foreclosed.

I realize the CoC returns will be different year to year due to the fixed costs. I will look into the CAP rate to see what it looks like when the smoke clears. Thanks for the input!

I agree with Scott that instead of using a 50% rule, you need to look more into the detailed expenses.

To me, the taxes and insurance numbers are high. If you are going to be using a property management company, it will take you 5.5 months of rental income to cover property taxes, insurance, property management, and vacancy. 4.5 months of rental income will cover your debt service, so you have just 2 months of rental income to cover your cash flow and any repairs.

The numbers above don't include any repairs and maintenance reserve, once you include that, your ROI starts going down. I don't have much experience with new construction, but I like to budget $100/month for my SFHs toward repairs and maintenance reserve and for a duplex, I would do $150/month towards a reserve account.

Dawn I would say the rate is high because of this:

"Bank will do the deal at 15% down and 10 year fixed 6.5%"

Only 15% is being put down instead of 25 to 35% the typical bank is asking for.So they price potential of default and all the other factors with appraisals and equity spreads into the rate.

For much larger down the investor on the loan will take a much lower rate if it is a premium property.

Less risk-less return is almost tied to anything.

You need to go back a few years at least.I like to go five to ten and see how much insurance and property taxes have risen for that property on an annual basis.If they have not risen and stayed flat or went down I find out why.

Could be a mistake on the city or counties part and it's fixing to go up or could be a temporary assessment relief program etc.

The point is if these sharply rise in the near future it can throw off your projected numbers.

I would try to fight the property tax if comps support it and get the taxes lowered to increase your bottom line.

Regardless of age if you mishandle a a property (even a new one) and get crap tenants in there your maintenance costs will be huge.I have seen the wrong tenants DESTROY and brand new looking apartment in a matter of months.

They also created a bug problem for the other good paying tenants that kept their place clean.

With my buildings I have it in the lease that we do unit inspections every few weeks and if they do not keep the place clean then we evict immediately.

When tenants apply we find when we say this upfront it gets rid of the deadbeats wanting to live like slobs,have unauthorized pets,and have big parties that trash the place.

When factoring repairs is this property local to where you live?? If not you will rely on a property manager and there network of service people.

Some electricians want to charge a 100 fee for installing a wall socket plug with a service call.You can do it yourself for about 50 cents in parts if you have the knowledge.

So repairs and what they cost will depend on how you intend to manage and repair the property (yourself,hiring a handyman,or hiring a skilled trade for that job,or have an onsite maintenance repair man).

Since your property is small hopefully there will not be too many repairs issues.

Don't fool yourself that since it is newer the property doesn't have problems.I watch Mike Holmes and he goes in property after property with many being just a few year sold and finds tons of problems sometimes costing tens of thousands of dollars or more in repairs to get it fixed right.

Many builders will cut corners or hire subs for certain jobs and be unaware of the problems and things that were not done correctly.