Calculating 20-30% CoC return. Check my calculations

11 Replies

I am living in the twin cities, but looking to buy rental property in my hometown of Duluth. The reason I am looking in Duluth is because I know the city very well, rents are high compared to property value, and I have many connections there for repairs. 

I keep running calculations on these properties, and even at list price I am getting insane returns. I usually calculate like 10-15% in the twin cities area. I thought I was being conservative on expenses but I don't know. Just looking for some input.

This is a duplex. Both 1 br units renting at 650 and 700. In a not-so-great part of town. 

@Dillon Leider , can you REALLY borrow 80% LTV over 30 years fixed at 5% for investment properties?

I believe you'll find that either: you'll be asked to come up with a higher deposit, or, your loan term will be shorter, or, the interest rate will be higher. Or, all three. [Any of which will ruin that CoC figure].

But if you know otherwise, kudos. Care to share: which Lender/s?...

Not so great part of town may mean a couple things you didn't plan for.

1.  Finding quality tenants will be more difficult (consider raising your vacancy rate).  

2.  Maintenance costs may be a little higher.

3.  I noticed that you also don't have a line for utilities cost (even if the tenant pays them you will have to pay when the unit is vacant.)  Where I live we pay the water bill for the tenants.  We do this because if someone defaults on the water bill the city will put a lien on your property.  This may be different in your area, but you should check just in case.  

4.  Legal fees- This may be under Capx, but you may want to plan to tuck a little away in case you need this.

5.  Office expenses (If any)- Computer, printer/ink, website, marketing materials.

6.  Do you have a budget for improving the property and forcing appreciation/rental value.  If it is not your plan you may want to consider tucking some money away for unexpected initial repairs (building inspectors miss stuff sometimes).  If so, add it to the sheet.

I can't speak for your area, but $1350 rent on a 97K property sounds pretty good to me!

Good luck!

@Dillon Leider also should include PM costs even if you manage yourself. I don't think that was on your sheet.

@Brent Coombs

What would you usually do? I thought at this moment it might be silly to not be fully leveraged. I could pay more down. I don't want to, but I could. I based this interest rate off of what I got for my primary residence rounded up to be conservative. I did not know that there was a remarkable difference between primary residence and investment property interest rates. What sort of rates would you expect right now with 20% down? What if I did a 20yr repayment? Is 5% reasonable then?

Initially, I will be working with the broker that got me my primary residence loan. I will definitely shop around when the time comes though.

@Christopher Price

 Wow, thanks for the great tips! 

3. I've added $100/mo for water/sewer/trash. Tenant will pay gas and electric.

6. Don't plan on making big improvements initially. I was going to use part of Cap X and leftover from maintenance for stuff like paint and carpet. Maybe this is a bad practice? 

@James Clements

My dad will be managing this property for now, but I realize this may not always be the case so I've added PM fee. Is 8% typical?

Does not look nearly as good at this price after we account for everything you all have said! 

@Dillon Leider Hi! Wanted to throw my 2 cents in since im currently analyzing a deal that my guess is pretty similar to yours

Here is my post if you wanted to comparte my numbers against yours

1- If there are any common areas, make sure you have an owners meter .  At least in allentown, pa, any common areas need to be metered separately from the tenants.  That costs me 25/mo just to have a meter hooked up for hallway/basement lights

2- i get billed 50/unit for management , so 8% seems solid

3- I talked to a few lenders, and for non owner occupied investment multi's, they want 25% down and rates of around 4.8-5%.  One lender was willing to let me buy down to 4% , but i havent run the numbers to see if its worth it.

4- I think its still a decent deal.  Youre getting over 100$ per door and if there is room for rent increases it could be a very decent cash flowing property!

@Dillon Leider , yes, I suspected you were just guessing regarding LTV, loan length and Interest Rate.

When you talk to your broker, see what they'll give you in WRITING!

My guess is: they'll be all talk, with NO guaranteed loan terms (until it's too late).

There's MANY threads about Lenders supposedly promising certain terms, but changing them (invariably adversely) on the VERY day that signatures are needing to be exchanged! But, please keep us apprised. Cheers...

I would say cap Ex should be $150 minimum on a duplex and repairs/maintenance should be 12-15%. Also, what about water and trash? Management? City fees? Vacancy is really only 5% on a duplex? To me this looks like an ok deal, but closer to 10% cash on cash

Originally posted by @Todd Dexheimer :

I would say cap Ex should be $150 minimum on a duplex and repairs/maintenance should be 12-15%. Also, what about water and trash? Management? City fees? Vacancy is really only 5% on a duplex? To me this looks like an ok deal, but closer to 10% cash on cash

Take a look at the second calculation I did. Then with $150 capx and vacancy at 10%, it is much closer to 10% CoC. Which isn't too bad, right? Would you offer less to get your CoC return up to around 12-15%? Do you own property in Duluth?

@Dillon Leider we were quoted 4.75% for 25% down and 5.25% for 20% down on 30-year conventional loans this summer for investment properties. The market moves every day, so these wouldn't be valid now; just sharing for some perspective. Be sure to confirm that the broker who handled your personal residence is well-versed in investment properties. That will help avoid last-minute problems. Also, try to build an extra 15 days into your closing timeline if the seller will allow, so you have some breathing room to close the loan on your first investment. Good luck!

Dillon, the deal is not bad. It will bring in some nice cash flow and should remain that way. Duluth is a stagnant market and likely will not have much growth or decline, so it will be steady cash flow and slow appreciation - not a bad thing if that meets your goals. I do not own in Duluth, but have family there and have looked into the market quite a bit. 

@Dillon Leider This is why you never want to buy at market rate.  Exiting will cost you maybe 10% including realtor fees, closing costs, get ready costs.  If you buy at 90% market rate you could get your 13% and be able to exit pretty cleanly.  Paying any more than that and you'll either lose money if you sell right away or your return will really be much less than 13% after paying those costs.

I've heard Brandon Turner say he wants at least 20% equity after rehab, and I pretty much agree.  Unless the cash flow is stellar, I don't want to pay more than 80% market value for a turnkey property.

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