2% rule, 50% rule and CapRate

[Kyle Ott]

I am new to Bigger Pockets and have been doing a lot of research for the last few months.  I am starting to analyze deals (which maybe aren't really deals!).  I am interested in multifamily units as they seem to me to reduce the risk of not covering the mortgage and increase the cashflow.  There are a couple in my area asking around 70K for a duplex.  According to the listing, they are getting around $1250/month for the two units (my research confirms this should be pretty accurate).  If I apply the 2% rule then I shouldn't pay more than $62,500 for the property.  If I then apply the 50% rule, I should be cashflowing around $335 an month.  Seems like a pretty good deal considering everyone says to try for $100/door.  As I was continuing my research, I ran across cap rate.  So I broke it down beyond the 50% rule.  Taxes - 80/month, ins 42/month (estimate), mortgage 335/month, 10% vacancy 125/month, 10% property manag 125/month and 15% repairs 187/month.  Totaling $894.  1250 - 894 = 356.  356 x 12 = 4272

4272/62500 = 6.8% 

The deal suddenly doesn't seem so good.  What am I missing?  Am I on the right track?  

For the record, I plan to do my own property management so I will increase my income on the property, but it still doesn't bump up my cap rate that significantly. 

Thanks in advance for the help!! 

[Cameron Tope]

Hey Kyle, 

I would first ask; what are you trying to accomplish? Cash flow? Appreciation? Learn by doing? Acquire units in a certain part of town? Eventually trade up to large complexes? 

What is your end goal? Maybe its just to find a cheap deal where you can cash flow while you learn the ropes of being a landlord? Nonetheless, begin with the end in mind. If a duplex with $350/mo in cash flow gets you closer towards your goal then do it. If not, then don't invest. 

By the way, as you get more experienced you'll begin to set "rules" for duplexes in your area i.e. duplexes need to cash flow $350/mo or have a 8% cap rate. You'll become more skilled over time. 

To be honest, it doesn't seem like a bad deal to get your feet wet, but again, does it get you closer to your goals?