What if I don't "buy it right"?
Buffalo, NY 路 Member since 2017 路 13 posts 路 1 vote
@Altwon Simmons
First of all, you don't need to hurry. You need to calculate and then make a decision to pull the trigger or not. Put aside the automated deal calculator and let's do this the old-fashioned way. You've got to walk before you can run.
1. It's a rental property. Figure a value through the capitalization rate. Let's begin with assuming that a 12.5% cap rate will work for you in a Class C- neighborhood. It does for most folks.
2. A Class C property always has a number of deferred maintenance issues (like that roof) waiting for you. So we're not going to worry about that in our initial calculation.
3. Figure out the Gross Operating Income per year. In this case, it's $18000 a year.
4. Now you need to subtract some numbers from that $18000. The main ones are property taxes. What is the property assessed at by Erie County? I did a bit of looking and this is the millage for the rest of your taxes: Non-Homestead property + school district taxes, 27.009026 mili rate. Sewer rent millage: 1.6535119. Erie county millage: 6.456522. Using the given county valuation for the duplex, figure the tax rate and subtract the taxes.
5. Are you going to have this property managed by a third party? Subtract $1800, 10% of gross rental returns.
6. How much in yearly maintenance are you going to need here? Replacing that roof on a structure that size is going to cost you $12,000 if you get a nice quote on it in Buffalo. I would subtract at least $2500 per year. Be on the safe side and subtract another $1500 for other maintenance issues. So $4000 per year.
7. Both tenants have been there for over 3 years. Subtract $1500 for vacancy, 2 months per year, which is optimistic but not particularly unrealistic in this case, I think. Worry about how you're going to upgrade it and put in college students and deal with their problems later.
8. How are you getting the money? Cash? Loan? What is the financing cost per year? Subtract that value.
9. Now you are at your net operating income (NOI). The asking price is 75,000. 12.5 cap rate is your target. So divide $75,000 by 8. $9375 is 12.5% of $75,000.
10. Is your NOI equal to or greater than $9375? If yes, buy. If no, do not buy.
It's a rental property. It generates income. You are buying an asset that generates income. It could be compared to any other asset: shares in a company, a hotel, a dog-walking business. Would you be happy buying stock that generated a 12.5% return on your investment every year? Would you be happy buying a dog-walking business and having the dog walker give you 12.5% of the money you sank into the business back every year? Probably. That's why you calculate the cap rate like this.
Is the property going to go up in value? Is it going to go down in value? That does not directly depend on the neighborhood and what single-family homes in the neighborhood are doing. It only directly depends on how much rent you can get from tenants living in those two apartments.
Hope I've helped.
@Altwon Simmons I am currently in contract for a duplex in Lovejoy- The REALLY bad areas come with significantly higher eviction and vacancy rates. Yes the cashflow is way higher %wise- but that doesn't make it worth it to have someone in the unit not paying for a 2-3 month eviction/ turnover timeframe. That would lower your yearly returns by 25%.. Additionally, these warzone neighborhoods also tend to have higher crime rates and tenants tend to require more repair in between tenants during turnover times.
It's all about risk analysis. I picked a working class, lower middle end neighborhood to reduce the warzone concerns listed above while still getting a decent price. And keep in mind, a lower price doesn't make it a better deal. I got a steep discount because my seller is in a tight situation and has no money to fix up the property before selling it. I walked in knowing I had 3K in work to put in but I saved 13K off the price that I would have been cashflowing comfortable ($200 per door). That puts me in a great position. THAT'S where the money is made. On the purchase.
TLDR: Neither are wrong- they each come with different issues- Make sure you are analyzing neighborhood vacancy and eviction rates for these properties and factoring that into your cash flow calculations.