Bad Deal?

Question

Hello

I've owned a 2 unit double near Buffalo, NY for about 6 years now.  I rent both units which pay for my mortgage and leave me an additional $200 a month.  I always thought this was a pretty good deal and was looking to purchase something similiar in the area to do the same thing.  With prices falling I can find many doubles in the area for 50k-80k that bring 500-650 per unit in rent.  I was recently told that my current situation is bad...but was then promted to buy this person's book.  But it got me thinking...Is this a bad deal??

Jason Hanson · Answer

If the property cash flows $200 a month then you are good to go. The name of the game is cash flow, so I would ignore who ever is trying to sell you their book.

If you can pick up properties that cash flow $200 after PITI, then I would do that all day long.

Zack Polino · Answer

Thanks for the feedback.  Going with what you said gainesvillej, I don't have to do a thing with my property.  Don't get me wrong, I have to communicate with my tenants, have my plumber stop by occasionally, but as a whole the property is in great condition and doesn't bring me headaches.

I want to purchase another double in the area but be a bit more firm in getting a property for the price that has a better cash flow.....now I just need to find out where to come up with a 20% down payment!!

Jason F · Answer

It's a relative.

Does the $200 a month make it worth what you have to do to make it? Don't worry about what everyone else thinks.

I'd say if you were killing yourself on the rental for $200 a month, let it go. If it's easy, buy another one and see what happens.

Jon Holdman · Answer

There are a number of posts here that deal with the real expenses associated with a rental.  Search for "50% rule".  There are many more expenses than just the taxes and insurance that are usually included in your payment.  A common rule of thumb is that all expenses, including taxes, insurance, utilities (at least when its vacant) vacancy, advertising, tenant screening, maintenance, property management, tenant damage, legal fees, etc., all add up to about 50% of the rent.  I've heard percentages as low as 33%.  If you want to be conservative about the deal, use the higher number.

Then, cash flow = rent - expenses - P&I payment.  Is that really a positive number?

You often hear a statement like "this cash flows" meaning the rent is higher than the PITI payment.  That ignores the many additional expenses, but is often stated.  Especially by people who have a vested interest in you buying something.

Some expenses, like new roofs, new furnaces, or major tenant damage only happen once in a great while (hopefully).  Nevertheless, over the long term they do happen.  If you are only getting $200/month after the PITI payment, you're not really setting anything aside for these expenses.  A new $4000 furnace will wipe out 20 months of "cash flow".

A duplex you could buy for $50K and rent for $1300 total would likely be a good deal.  A duplex you buy for $80K that rents for $1000 is probably, at best, a very marginal deal.

Josh Layhue · Answer

I'm new to this, so take it for what it's worth.  But you said your current property allows you to pay the mortgage and have $200 left over each month.  Do you mean $200 left over after mortage + expenses or just the mortgage?  I would imagine that if you meant only the mortgage that means your expenses are probably more than $200/month and that would leave you with negative cash flow overall.  Can you clarify?