Thoughts on numbers

20 Replies

Hey. Just about to pull the trigger on a purchase in Florida, north of Fort Myers south of Tampa.
It’s a duplex with 30%down for mortgage reasons.
The numbers still work. But certainly not a home run. Just a base hit I feel. Mind you this is the first time at bat in the majors.
Purchase 220k, monthly income 1850, monthly expenses 1441, purchase cap rate 6.61%, cash on cash 6.66%. Cash flow 408/mo
I’m figuring this isn’t bad as a getting in the game starting point. Thoughts?

@Kevin Scott ,

You live in Toronto, so that must be an out of state purchase...just make sure that you calculate in the property management expenses and vacancy rates and all other fees that may be charged for advertising and renting your property. Some of them charge half a rent for new tenants and 25% for renewals.

Good luck!

CoCR way too low for me.  First time out, or last time out, it doesn't matter.  They all have the same criteria, and they all have the same impact.  Saying "it's the first time out" to make a deal you wouldn't have done 5 "times" from now, is just a rationalization to make this deal sound good.

Also, I really hope the "30% down for mortgage reasons" doesn't mean you had to put more money down to get your cash flow higher...or worse, to turn negative CF into positive CF.

@Joe Villeneuve Makes a great point! Putting additional dollars down in order to generate a high cashflow is typically not a great use of your money and drives down your Cash on Cash Return.

Originally posted by @Jim Murray :

@Joe Villeneuve Makes a great point! Putting additional dollars down in order to generate a high cashflow is typically not a great use of your money and drives down your Cash on Cash Return.

 Actually, the resulting higher cash flow is an illusion.  All you did, was pay your negative cash flow for the next (fill in number here...depending on how much you added to your DP) years, up front.

Hey Kevin,

The most difficult part of underwriting the numbers is making sure the expenses are accurate. I recommend digging in deep and see what could potentially be missing. Certainly the numbers as they are now make sense. However, with a duplex, vacancy and lazy property management could wipe out all of your income. Unless you have a strong connection to the Fort Myers market, I would suggest saving up to buy a bigger deal with at least 16 units or invest in with a syndication where you can get inside look in the business while staying on the sidelines.

Check out my blog for more investing ideas and let me know if there is something you would like me to study and talk about.

Cheers!

Sounds doubtful ..

Large down payment, 6% cash on cash? I wouldn’t do it. Also out of state / country, you can’t really se what’s going on especially for your first.

@Kevin Scott    Not sure what expenses you are counting but that return is too low for me.   Keep looking!

Kevin.

There are way better deals than this out there. I'd recommend looking for something with 15% cash on cash return. 6% is terrible!

Starting out, I know its tempting to invest thousands of miles away, but see, really dig deep to find a deal in your own backyard. It makes the most sense to work in your own "pond" and learn the business a few miles away vs thousands of miles. People do it though, either way, wish you the best of luck! 

Do not do this deal. Take your $60k and put it into an index fund until you find a better deal.  6% return for taking on both real estate AND international fx risk?  No. Non merci. 

@Joe Villeneuve @Michael P. @Michael Totman  Great discussion, so what should you be aiming for, what does everyone consider to be “acceptable” or good for a cash on cash return whether your first deal or 100th?

Originally posted by @Matt B. :

@Joe Villeneuve @Michael P. @Michael Totman Great discussion, so what should you be aiming for, what does everyone consider to be “acceptable” or good for a cash on cash return whether your first deal or 100th?

 Hi Matt, that's a personal number for everyone to decide on their own and personal tax situations should probably play a role in there.  For me personally if a cash on cash return isn't better than an exchange traded investment return then I'd probably focus on other things.  If 6% is the max on a RE deal then you can probably do better. That 6% will be less some years and won't be much more than 6% plus inflation in the future without major changes. Index and other funds can probably give you consistent 8 - 12% gross returns for 0 headache and they don't call you at 9pm when their kid flushed their toys down the toilet and it's overflowing everywhere because they don't know how to turn the water off.  Without considering taxes, cash on cash for me should be north of 12-15% and then adjust from there considering the quality of tenants that will want to live there in direct relation to how much your PIA risk premium is. 

Of course personal tax considerations will change for each situation. 

So here's the deal:

With a projected 6.5% CCR you are not going to make cash flow. That's just as much of a fact as me not being a ballerina, though some days I try :)

However, here are the questions:

1. Is the 6.5% CCR the purchase CCR or the exit CCR?

2. Is the $220,000 PP the purchase value or the market value?

3. How long will you be holding, and on what terms do you project getting out?

What I'm saying is - what's the projected IRR?

@Ben Leybovich Thank you for your post! CCR's are: ROI CCR 6.66% Purchase Cap rate 6.61% Proforma Cap 5.81%
Purchase price offer is 220k, asking is $249 (at market value) - hold for at least 5 years. We are not putting more in to get better cash flow. That is not the mind set here. Property is easy fixer with paint and cleaning. Stable long term tenants in place. Will be raising rent moderately over the next 2 years to bring up to market rates.

@Kevin Scott it's NOT a deal. Might look like one coming from Toronto, ON but it's not!

Said with Love,

Ivan

I think more than saying it's not a deal, I'd first ask:

  • What expenses specifically are you including in your numbers, and are you including anything for maintenance and vacancy?
  • What kind of loan are you getting that lets you only put 30% down as a Canadian (since you can't qualify for US mortgages), and is that loan adjustable?
  • Do you have a certain drive towards that part of FL for some reason? There are certainly higher cash flow areas in the US than that, and as we all know as of very recently, there's a high hurricane and otherwise risk down there. (is there any chance you're looking at this property as a possible vacation/2nd home for yourself?)

What expenses are you calculating? 

@Kevin Scott  I agree with what has already been stated. In my opinion that is too much in for too little return.  Also, for the expenses to be accurate you will want to factor in vacancy, turnover, capital expenditures, and property management costs.

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