BiggerPockets

P M,

Is it an investment, so I calculate anytime with a 10% CAP. In your case is $515 + $450 x 12 = $11,580/2 (50%) = $5,790 / 10% CAP = $57,900:
So the price must be $57,900, with your 20% down you reach this price ($56,000). So no problem for a buy.
But you can negotiate the ask price lower then $66,000 with a 20% down payment I think.

-Uwe

Not quite sure I understand your calculation, Uwe. I'd do this math:

Rent: $965
Expenses: $457 (50%, which I see you're using Uwe)
NOI: $458
Desired cash flow: $200 (two units)
Max payment: $258
Max loan: $43,032

I'd use that as the PRICE otherwise you're putting a the down payment and getting nothing in return.

I did an investor loan less than a month ago at 5.875%, so you should be able to get closer to 6%. You may need a 25% down payment, though.

Good discussion.

Uwe- is the division by 2 included in your cap rate calculation in order to represent the amount of the income stream consumed by maintenance, in this case, 50 percent?

I want to make sure I'm understanding the cap rate calculation correctly.

Also, to both Jon and Uwe- let's say I got the price to either of your preferred levels. You seem to agree that maintenance of the property should cost the same regardless of the purchase price.

If this was your first rental property, how much would you set aside in reserves as a sensible pool of money before making the purchase?

Thanks for your insights.

P M,

You have following costs: property taxes, insurance fees, common electric, water, sewer, trash (don´t pay the heat for your tenants!!), lawn and ground keeping, possible advertising, accounting, permits, licenses, maintenance and the biggest problem vacant units or not paying tenants.
This is all expenses, on a two unit can these expenses be low and not 50% of the rental income, but the best is you plan with these.
My calculation with a 10% CAP is, when I pay the house in full (here $57,900) and leave the NOI income untouched in the bank account I paid the house after 10 years.
I don´t calculate with rates longer than 20 years and I will buy and hold forever. So your payment with 20 years would be $415 monthly (6% interest) and you have an cash-flow (income) of $812 yearly, at 30 years ($347 payment) you have an cash flow of $1,624. Thats unusual I know, but we work different in Germany. Longer payment years = higher interest to pay (for 20 years you pay $41,656 only on interest, with 30 years you pay $67,070 for the interest) huge sum eh ($26,000 more)?

Its clear a two unit can be have lower expenses than 50%, I think 40% is a good mark. The best is on your buisness plan you calculate with 50% and you become every year an nice bonus.

Reserves for a two unit should be $4-5k no more, if the house fully rented now and the leases longer than 6 month.

And Norm, I dont think you can the owner persuade to lower his sales price significant. In Jon´s case ($43,000) with 20% down payment such as $55,000. A minus of $15,000 and the seller says definite no. Okay a two unit is not the investment type to gain wealth, but you must calculate with a CAP on any investment.

-Uwe

P.S.: Sorry my english is not so good, but I hope you understand the explain from me.

Norm, Youre right with the owner and his clue, but when an owner says I will $70k and you offer $55k then he says NO I think. If this property since 6-7 month on market then the buyer has a chance to negotiate significant these price.
I got it by myself in Cleveland, old price was $119k I buy for $91k now and these property was 7 month on market and the seller was motivated to sell.

-Uwe