Hi there, I'm a first-time poster and looking to be a first-time real estate investor.
After looking for about a year, I think I've found a property I might buy, I'm wondering if someone can poke some holes in the plan (if there are any). Or make any suggestions?
-2 apartment home, Sale price $300 000, in Atlantic, Canada. Built in 2007, no major repairs needed in the near future. In the strongest rental neighboorhood in a metro area of ~210 000 people. No H.O.A..
- The housing market here is most likely bottomed, there has been a recession in the area in the past couple years. However, the economy has already turned around. The nominal GDP growth is estimated at ~4.3% for 2019, and the area is on target to meet that.
- Currently rents for $2300 (POU), $1400 for the main apartment, $900 for the basement
- Running my numbers I'm allowing a 5% vacancy rate, 10% to go to property management, $3100 annually for property taxes, $3000 annually for repairs, $1000 for home insurance, and 3% increases for property value and rents per year.
- I don't think I will need a property manager, so that would boost cashflow typically by $230 a month. I also think the $3000 a year is high for repairs given the condition the house is in today.
- Comes out to +$175 / month in cash flow if I put 20% down, with $3000 annually for repairs, and $2760 annually in property management.
- Internal Rate of return of ~15% and cap rate of 5.5%. I think these numbers are on the low side though because I've included 10% for property management, which I don't actually plan on using.
I'd appreciate if I'd be able to get some input on whether this seems like a sound investment? Or if anyone has any comments/recommendations?
@Charles Price , I'm showing your cash flow closer to $45/month.
- You're forgetting CapEx. I usually figure 15% combined with Repairs.
- What about water/sewer? This is typically paid by the owner in a MFR.
- Lawn care and snow removal? (not included in my cash flow estimate above).
You're unlikely to cash flow on this because you're pretty far off of the 1% rule.
Thanks for the feedback @Jaysen Medhurst . On notes 2 and 3, water/sewer are factored into the $3100 in property taxes, and lawn/snow is on the tenents.
I would agree with Jaysen on the 15% for Capital Expenditures and repairs. I would also continue to include the property management cost whether you plan on managing it yourself or not. Reason being that if you want to scale and purchase more deals, eventually, you will not want to handle property management in the long-term. If you are managing the property, pay yourself that fee and choose whether or not that money goes back into the property or gets factored into cash flow.
Also, your cash flow currently seems very low. Investors typically must shoot for around $150 per unit per month with a 12% or higher cash on cash return. This deal sounds like it may have potential if you can continue to play with the numbers.
Final thought, I noticed you don't include an interest rate or potential mortgage points in these calculations (I am assuming you have). But this can play a large role in deciding whether you cash flow. This can be taken out if you are purchasing the entire property for cash, but to that point, having debt on property can be a positive thing if it allows you to purchase more property at a greater rate of return, compared to the interest rate. Happy investing!
Thanks for the comments @Trevor Scheiderer .
Re-adjusting the numbers, to put %15 of rent into repairs and Capex and including %10 for management its looking like $115 in cashflow, with a %13.9 return.
I used 3.49% as the interest rate on the mortgage.
@Charles Price It all depends on what you value. While a 13.9% return is very good, are you comfortable receiving $115 per month in cash flow? Is the deal worth the hassle of purchasing? Are you content with an extra $1,380 per year knowing that something may go wrong where you have to utilize those funds? It is still a risk to take, but these are important things to be aware of just in case something goes wrong.
@Trevor Scheiderer I've been looking at the numbers over the first couple years. Without the property management for the first couple years, and maybe deferring renovations and improvements, the deal would have a lot more positive cashflow to start with. The trade-off is that the management would take me time, and I'd probably do the minor repairs or improvements myself.
I'm looking to diversify my investments away from 100 equities, so I'd be happy if I could average a 13.9%.
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