what am I missing? First deal numbers.

Question

Hello all,

I have been doing quite a bit of research lately and am within a few months of pulling the trigger on my first property. My question is, here in Fort Wayne, IN there are quite a few homes around the 15-30k range that pull 450-600/mo in rent. The cap rates on these run above 10% every time I calculate it. These properties are downtown but not in the worst part of town. Why would I not pursue these types of the deals with the high cap rates?

Cap   Rate

Net Annual   Income

2868

Purchase Price

20,000.00

Cap Rate

0.1434

Annual Expenses

Rent

Taxes

312

5400

Annual

HOA

0

450

Month

Insurance

600

Management fee

540

Vacancy

540

Repairs

540

Mortgage

0

2532

Any insight would be great!

Thank you,

J

Greg Carrier · Answer

We do houses that are valued in the 50K range but our average investment is in the 35K range.  We can pull $700 to $725 a month up here in Northern Indiana.  The risk that I see is in capital replacement costs.  a roof is a roof regardless if rent is $450 a month or $800 a month.  Same with cleaning up between renters etc.  I know others who do those houses and I am sure it works, but expect repairs and capital and turnover might be a bit worse than other properties.  That's my two cents in any case.  Good Luck!

Thomas M. · Answer

Justin, just some general comments based on things said thus far. Some good points have already been made by other posters. Multi units have the better cash flow upside, but are much harder to sell down the road. Why are you looking to use a management company with your 1st property? They will charge you a higher fee than if you owned, say 10 properties. Just something to keep in mind. These areas do need investors, but there's many reasons, like crime and other factors, that make these properties so inexpensive. Make sure you have a great understanding of the condition of the property (what repairs are needed now and in the near future) before making your offer. Like Greg said, a roof is a roof no matter the rent. Best of luck!

Justin K. · Answer

Also, any recommendations for CPA's and property management companies in the area? I have a few lined up but wondered who is real estate investor friendly that you guys use.

Justin K. · Answer

Thank you everyone for your information. I will absolutely love the opportunity to meet you two for lunch or something if you do not mind. The next month or so will be busy with some things but maybe I will reach out in May or so? I do feel that I am at the point of indecision because of so many options! Do I do a duplex or do I snag up a few homes that are on the lower in for 20k. The capital expenses was a concern of mine on  the cheaper homes but I could also pay these off free and clear faster.

Thanks again everyone for the advice.

One follow up question, why should I not worry about cap rates on a single family home? Just curious for my knowledge...

Chris L. · Answer

@Justin K.

I have had great success with these type of homes.  The key ingredient will be your property management company.

@Kenneth Garrett

The tax numbers posted are annual numbers not monthly numbers.  That is a benefit of investing in Indiana over Illinois.

Creig Leu · Answer

I am currently investing in Fort Wayne as well. If you would like to meet up sometime and dive a little deeper into the numbers I'd be more than happy to help

Kenneth Garrett · Answer

@Justin K.

Taxes                   312

HOA                        ?

Ins.                         50

Prop mgmt.            45

Vacancy                 45

Repairs                   45

Total                      497

Rent                       450-600

Cash Flow              -47 - +103

Not sure if there is a HOA fee

Don't worry about cap rate on a single family home.  Use comps for your values.

P&I is not included.  This project is negative cash flow.  Not a good investment.

If this is not correct please update.

Arpan Patel · Answer

It is a bit hard to follow your numbers. Could you put them in the BP calc and then share the results of that calculator? I would be happy to help you walk through the numbers if you can share the output of that calc.

what am I missing? First deal numbers.

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