Newbie trying to understand the math involved in plex properties.

5 Replies

My goal is to purchase a duplex (or possibly tri/fourplex) with an FHA loan as my first home and live in one of the units here in Fayetteville Arkansas. After that is said and done I want to plan how I purchase the next ones.

I've been learning a lot from research here on BiggerPockets and books and I'd like to give you guys a walk through of how I'm seeing things so you can tell me if I'm absolutely wrong or if I'm going in the right direction.

I found a property in my area that I perceive as a possible good investment that I'll share the details on here.


List Price: $149,900
Rents: Current: $1,380 Potential: $1,600 Realistic: $1500
Down Payment: $5565 (3.5% FHA)
30 Year fixed 4% interest rate.
FHA principle and interest: $803.
Est. Taxes: $1600
Est. Insurance: $1500 (Arkansas average homeowners insurance is $1060 so I over estimated to avoid hidden costs. Any advice here would be appreciated)

Maintenance Factor: 15%
Vacancy Factor (College Town): 10%

So with the estimated $1500 I feel I could easily rent these two units out for, I calculated these things and came up with $63.67 monthly cash flow.

Now, considering I won't be renting out both sides, I plan on using my full time job income to provide regular "rent" for my side to cover that unit. I am also single so I would like to rent out a room or two in my unit to cover most of that out of pocket cost. I will also be managing the property myself to save costs and learn the ins and outs.

I've read that you should try to shoot for $100 cash flow per unit to consider it a good deal. But with the much lower down payment, and the equity this will build for me, could this still be considered a good investment? This is also not factoring in that I took the list price at face value and could potentially get a lower purchase price.

I would love to hear everyone's input and opinion. Questions welcome.

Have you tried running these numbers through the rental property calculator on the BP site?  You can use it for free 5 times (edits count as a time) and then unlimited if your a pro member.  They are helpful for me.  Also, have you shopped around for interest rates? We are closing on our first deal the end of this month and was able to get our bank down almost one percentage point because my husband had found a bank that would give us a better rate.  When he told our regular banker, she countered even lower.  It's fun having banks fight over your business.  I had no idea they would do that! Also, will it need repairs? and what about appliances?  Just trying to think of other stuff that might come into play.

The method of your analysis appears sound. But I suggest using the desired profit ($100/mo/unit of free cash flow) to back into what you'd be willing to pay for the property. The list price really isn't relevant to you. It's just what the seller has put out there. You won't know if they're willing to move or not until you make an offer.

But you need to solve for some variables first.

1. Property taxes can be found in arkansas from I assume this property is in Washington county. I've never invested there so not sure how their office works. But typically if you have trouble you can always call them. Most county clerk offices are very helpful if you are polite and friendly. This is a number you don't have to assume. But do be aware it's possible a sell could result in the property being reassessed and could change the number. But even still this is the best figure you're going to find. Round up $100 to be safe. Because they will go up sooner or later.

2. Repair cost. @Brenda E. hit the nail on the head with this question. What kind of condition is the property in and do you need to do any repairs? J Scott has a good book on estimating repairs if you don't have much experience doing this. I've made good use of this and similar books b/c I don't have any construction background and need help installing a light bulb. I have to protect these soft and supple fingertips for typing on the keyboard you see...

3. Regarding management fees I strongly encourage you to run the analysis as though you are paying someone to manage the property. An 8-10% figure is a good ball park. You want to invest in a property that doesn't need "free" property management in order to make money. Otherwise you're locking yourself into having to do it yourself in order to break even or cashflow. Your time is valuable and will become more so as you get older. You make your money when you purchase a property. Back to the chess analogy from a previous post... Know why you're doing what you're doing now so you setup yourself up to back away from the business/property in a few years.

4. Rents. I strongly suggest you run your numbers at current rents. The seller shouldn't be rewarded for not renting at what you think the property could rent for. Always run your numbers and make your offers on as many real numbers as possible. You may be buying for potential but the seller doesn't get to sell to you based on potential. He/she doesn't know how good of a manager you are. He/she didn't realize that potential while they owned it.

In summary provided the property is in good rentable shape this has potential. Rerun your numbers and make an offer based on the NOI. Make the offer contingent on inspection and financing. Don't be afraid of making an offer that's too low. I just had an offer rejected on a plex property yesterday. No worries... they weren't motivated enough to make a deal that is profitable for me. Time is on our side. There's always another deal. Your job is to find the right one that meets your criteria and fits into your plan.

Contact me directly if you have questions. Best of luck and keep plugging away at it.

Very good points made from the other posters. 

I would add a couple of things:

Run the rental calculator using the current rent and adjust your numbers until you come to the desired cash flow of $100 per unit. That is your goal purchase price or lower.

What's your exit plan? Something happens to your job or you have to sell. Can you sell for more than you paid? What are the comps in the area? Look at what has sold that is comparable to this property. 

Watch a couple webinars on here. They talk about some of these. Buy the books too. Great advise in those.

Just a couple of things that came to mind.

Thank you guys so much for the insight! That was exactly what I needed and was looking for. You guys are so great! Every last one of you.

@Paul Thompson I love your point about not purchasing based on what I think I can rent it for. I definitely hadn't thought of it that way.

@Brenda E. and @John Turner I ran a local property I had been looking at through the calculator as accurately as possible and was blown away by all of the information it gave me. The tools here are incredible! I will definitely be getting a pro account for these features. Will be a great investment.

Thanks again everyone!