If you're going to self manage and you're willing to work for free:
cash flow = (rent * 0.64) - P&I payment
And then
Cash on cash return = annual cash flow / total cash invested
Note that those cash flow numbers assume you're doing a good job of running the property. A run down junker or a bunch of dead beat tenants can result in much lower, or even negative, cash flow.
That's just a quick and dirty analysis to determine if its worth digging deeper. If you like those results, dig deeper.
Two other criterian that I think matter too.
Are you getting a good deal? I'd rather not pay retail price because if you have to sell quickly, you'll lose, at best, all your transaction costs
Is there demand? Theoretical cash flow won't turn into real cash flow if you have units vacant half the time. Really, though, that means the rents are lower than you might other wise think. But some places really do have very high vacancy rates and you can't get tenants are any price. You don't want that.
If you're going to self manage and you're willing to work for free:
cash flow = (rent * 0.64) - P&I payment
And then
Cash on cash return = annual cash flow / total cash invested
Note that those cash flow numbers assume you're doing a good job of running the property. A run down junker or a bunch of dead beat tenants can result in much lower, or even negative, cash flow.
That's just a quick and dirty analysis to determine if its worth digging deeper. If you like those results, dig deeper.
Two other criterian that I think matter too.
Are you getting a good deal? I'd rather not pay retail price because if you have to sell quickly, you'll lose, at best, all your transaction costs
Is there demand? Theoretical cash flow won't turn into real cash flow if you have units vacant half the time. Really, though, that means the rents are lower than you might other wise think. But some places really do have very high vacancy rates and you can't get tenants are any price. You don't want that.
Hi Alex R., it also looks like you are financing through Owner Occupied FHA. In that case, no matter how much equity you have, you will have PMI insurance for 60 months under current rules. Not sure if you are going FHA or not? That is just another number to factor into your equation that the 50% rule (in your case 64% rule) does not really account well for.
I am in the process of completing my first deal as well. FHA financed duplex OO. I am subtracting the PMI insurance as well from my Debt Service (P&I) to make sure the deal works. And when PMI is removed, it will be just more cashflow--nice!
So IF you are going FHA, your math might look like:
Cashflow = $2,370 x 0.64 - $852 ($702 + $150 for PMI) = $664.80
I look at what the market is for Cap Rate, GRM, Comps. I apply a discounted cash flow analysis looking at factors such as repairs, improvements, and any negative attributes about the property. This is usually a good indication but really depends on what the market and your gut telling you.
What is good resource to get comps for duplexes? Loopnet and CoStar is out of my price range anything "cheaper"? Is the MLS reliable?
To add how far back do I need to go to get these comps?
What about distance? Reason being is that I have a motivated seller whom wants to sell but finding comps is kinda difficult since it is among a ton of 2 story rowhouses and the "neighbor" is a 2 story rowhouse
other resources could be price history, sale records, current and past tax assessments and Zestimate.
Look at al these data and make an offer accordingly.
**************
Is the MLS reliable? In my city YES. ay change first appears on MLS followed by Trulia, zipreality, zillow,...
**************
And distancewise, if this is your first deal, it shouldn't be more than half an hour drive from your primary residence
What is good resource to get comps for duplexes? ... Is the MLS reliable?
...
Duplexes would be comp'd using the MLS; 4 units and less are usually considered as residential (with some exceptions), and similar sales can be found in the MLS. Most duplexes can be comp'd using the same resources as one would use for SFR.
What is good resource to get comps for duplexes? ... Is the MLS reliable?
...
Duplexes would be comp'd using the MLS; 4 units and less are usually considered as residential (with some exceptions), and similar sales can be found in the MLS. Most duplexes can be comp'd using the same resources as one would use for SFR.
Is there any exception for buying a 5 or 6 unit property on a conventional residential loan with low down and low interest rate ?
Craig Sturgill you said " Alex R., it also looks like you are financing through Owner Occupied FHA. In that case, no matter how much equity you have, you will have PMI insurance for 60 months under current rules. "
I met with a loan guy yesterday and he did not mention this. Although if I go FHA (I probably will have to because of the down payment) I doubt I will be at 78% equity in five years, I did not know this fact. Thanks a lot for alerting me to it!
Thanks to everyone else in this thread too! I had the exact questions as Alex. Jon Holdman the .64 is new to me if you plan to self manage, which I do. I was doing .6 assuming I did not hire property management since it looks like they run close to 10% all said and done. Is the extra .4 accounting for them taking a half month rent when they fill a vacancy (seems standard in my area?)
I just want to make sure I have a solid understanding of everything by the time I find my property (hopefully soon!)
Eric F., exactly. If you get charged half a months month's rent to fill a vacancy, that's (1/2)/12 of your gross annual income. That is, 1/24th or 4.17%, to be more exact. So, you'll pay the PM 10% of the rent you do get plus 4% for filling a vacancy. Of course, you may have a tenant that stays 10 years. Or, you you may have to fill more than one a year. So, this is just an estimate. But the cost of a PM is significant.