Beginner Investing in First Multi-Unit

15 Replies

Good morning all,

I am relatively new at real estate investing. For some time, I've been reading & watching BP podcasts regarding rentals. I feel that I've done most of the ground work, minus actually buying a property. My goal is to make my first investment at the beginning of 2020, but I am in need of some guidance from you all. Recently I had found a duplex near my house that is currently fully rented. I'd like to get some input on the numbers I worked together below: 

Purchase Price (assumed) - $61,000 

Down Payment - 20% 

    • Monthly Total Rental - $1,200
    • Mortgage - $227
    • Tax - $110
    • Ins. - $75
    • Vacancy (7%) - $84
    • Repairs (5%) - $60
    • Cash Flow - $644

    Cash on Cash: ~55% assuming additional cash for fees 

    NOI - $787

    Cap Rate - 15.4%

    Thoughts? To my eye, it seems like a deal that I would benefit from, but I am concerned about an unaccounted calculation on my part. I'd like to add that I am from the Pittsburgh area. 

    Thank you. 

    Why are you assuming purchase price?  Is that what the property is listed at, or are you offering a lower price? Or, are you just hoping to offer that to the owner and he will take it?  

    On the surface, the math looks good.  However, I would confirm a purchase price and then run your numbers again.  When I analyze properties I buy for me, I have a minimum return expectation.  If I can't get it, then I will walk away from the deal.  Try to figure out what the max you can pay is and still get the return you desire.  It will make it easier for you to negotiate when it comes time to buy.  I'm not saying to offer that out of the gate, just know how much you are willing to give before the deal is no longer of value you to.

    Thank you for the response @Sarah Brown . I should have used another term rather than "assumed". This property is listed slightly higher $69k, but I'd like to offer $61k. Even at full asking price, I am still reaching my return expectations. This property doesn't seem to show any immediate repairs, but that could vary after further inspection. 

    As for you minimum return expectations, are you creating this minimum cash flow by personal preference? 

    I recommend running your numbers as conservatively as possible. So 1) I would bump the repairs up to 10% to account for cap ex and repairs/ maintenance as well, unless it is in great shape and recently renovated. Additionally, factor in property management in case you ever need to outsource that. I recommend 8-10% there although you may be able to find cheaper in your area. You will also have leasing fees with property management, which can be up to 100% of monthly rent when you experience tenant turnover. (Ex: you have one unit rented at $1000/ month and you expect new tenants every two years. You will want to set aside 8% each month for management fees, as well as $1000*50% annual turnover rate. In this case, $80/ month and $500/ year for leasing fees, totaling to $1460 per year for property management). This will help you if you ever find yourself in a position where you are unable to manage the property, but don't want to sell just yet (Poor market, underwater on your mortgage for whatever moving but want to hold onto it, you scale and no longer have time to self manage, etc). Those are rough numbers though and would help to talk to a property manager in your area.

    Hope this helps!

    Thanks @Jake Tovey . At first I will be managing this property. This will be mainly to grow experience, as well as, I do think I can handle this small workload as a beginner. Understanding in the future this could change as my portfolio grows I could set aside 8% for management fees, so if/when that times does come to transition I could easily do so. 

    Being the first property, would you all recommend going through an investor friendly realtor or would you have any experience on tackling this alone? 

    I appreciate the comments.  

    Have you seen the property yet? Calculator musings are not great for first-time investors if you don't have the experience to see the property and know which numbers need to get adjusted. Especially with repairs. Too many first-time investors use the calculation as a percentage for repairs, but don't go into the property and realize what it needs now, not on a monthly payment. You will have upfront repair costs that don't work in the calculator. Sure, the numbers look ok on the screen, but what does the inside look like? How are the tenants? What are the terms of their leases? Are they over or under market value? Do the units need repairs? Have you seen the books to confirm the accuracy of the building's numbers? You need a lot more information to make sure you are making a good deal.

    Seems like a no brainer.  Is the property in an area that is increasing in value?  If you have your 6 mos of living expenses emergency fund and steady income, buy the property!!  Christmas is a great time to buy!  Wouldn't it be cool to say you started in 2019 instead of 2020?  

    @Mitch Pascarella I'm assuming it's a typical Pittsburgh home built in the early 1900's so ur definitely going to want to bump up the maintenance/capex if that's the case. For something like this that the rents are lower I'd make them both 10% so 20% total for maintenance and capex unless the current seller did a rehaul of the electrical/plumbing and all new mechanicals/roof. Does the owner pay any utilities or are they all separate and paid by tenants? Is there any lawncare that needs done? Also a lot of boroughs have rental permit fees they charge every other year so might be something that needs accounted for. I always personally factor in property management as well because you eventually might want it and in the very least you are technically paying yourself for the time involved with self managing. 

    Thank you all.

    This home was built in 1949 & the structure seems to be in good condition. Granted, I’ve only have the opportunity to do a drive by on this location. With tenants currently residing in this property, I am going under the assumption that major repairs wouldn’t be immediately for each unit, but that is up in the air until I do a walk through.

    Is it out of the ordinary to request information with regards to tenants this early in the process? Of course that information would be an important factor to me, but wasn’t sure if these questions would be able to be answered early on. I used the monthly income of 1200 from both units, which seems to be below average for this amount of bedrooms in this area.

    As for the exterior maintenance, lawn care etc. I plan to do this in the beginning. This location has a very small yard & is minutes from home.

    @Mitch Pascarella

    You got this, just do it! At such low cost for some good cash flow do it! Just make sure you save and budget properly. This is an investment not a job. Only relying on it for income/cash will result in increased risk. You might be making 60k a year at your job. I’m sure you will be fine if stuff doesn’t go perfect!

    Thanks all. This information was great to get in front of me, whereas I may have not thought about them until they popped up as an issue. I'm reaching out to the seller to move forward. 

    @Mitch Pascarella Yeah, self managing up front is definitely a good idea to start out and is what I am doing as well. But it is smart to make sure you can still afford the property even if you have to outsource property management. Always think worst-case scenario and make sure you can handle that. If you can handle the worst-case scenario, and there is potential with the property, then go for it. It's then up to you to bring the property up to its potential through the renovations and management of the property, but you can do so knowing you can handle it if things don't pan out. That's why I recommend factoring in property management into your numbers up front regardless of your intentions now.

    And Yes! I highly recommend you work with an investor-friendly real estate agent. I did and it was a huge help. PM if you want the contact info of my agent, although I am not sure if he works in the area you are looking at. He is mainly close to the city of Pittsburgh.

    Mitch, 

    Sewage can be lien-able and therefore some landlords choose to pay it. Also, you may want to confirm that the utilities are all separated. 2 water, gas, and electric meters. I own a duplex in Elizabeth, near you. I paid to have separate water lines run so that each tenant could pay their own water. I still pay the sewage for the reason stated above. 

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