Newbie landlord

16 Replies

Hey everyone. I'm learning about real estate investing and want to learn more about being a landlord and buying properties right. I'm convinced single family homes are not for me. I'd rather leverage my income in a duplex or triplex for starters. I've read where CAP rate should not be your only factor in purchasing a property. Obviously cash flow is a major factor as well. What other factors should I use or consider before purchasing a property?

Here is a property I am currently looking at. Can someone help me analyze this and determine what a maximum allowable offer price should be?

Asking price is $199,900

Cap Rate 5.40

Gross Ann Inc$20,100
Total Ann Exp$9,297
Net Operating Inc$10,803

With that very basic info most people are going to say pass on that deal.

Most investors consider a bare min of 8%.

10% is doing well.

Why would you want to buy this place?

How many units?

What size is each unit?

Not to sound like an echo of another poster (Hi Bob!), but what is the average CAP rate in the area? If you don't have any way of knowing (and you don't, not really, with a 1-4 family) than that number really isn't helpfull.

Is your NOI number before PITI or after?

It's a duplex. 2br on the first floor and a 1br on the second. Property sits on 1 acre of land. NOI does not include monthly payments or interest.

total sqft is 1600

Not sure of the avg cap rate in area. This is the first duplex I found. Is there a website that I can find this info on?

Originally posted by @Richard C. :

Not to sound like an echo of another poster (Hi Bob!), but what is the average CAP rate in the area? If you don't have any way of knowing (and you don't, not really, with a 1-4 family) than that number really isn't helpfull.

Is your NOI number before PITI or after?

Then that is a terrible, terrible deal that will not yield even a positive CAP. If CAP rate was something you should really be focused on, which, again, it is not.

Assuming 20% down, your principal and interest payment alone is going to total more than $10k a year.  So after expenses (assuming you calculated those correctly, you are at approximate zero dollars ahead for the year.

To try to be more specific.  You are talking about Gross Income of $20k.  (Is that actually historical gross, or what we call "Schedule Rent", which is the expected rent, times 12?)

I wouldn't pay more than about $100-110k for a duplex with GI of $20k a year.  There are those who would tell you you needed to be into it for no more than $80-90k.

Rather than focus on things like CAP, GI, NOI, why don't you list these numbers for us, and we'll work through it?

Estimated rent

Down payment/amount financed

Closing costs

Repairs, if any

Annual property taxes

Sewer/water

Insurance

Gross income of 20K is expected rent x 12.

I would want my down payment as low as possible to use the cash for any other deals that come along. 

These are the numbers I know of..

Total combined rent: $1675/month

Amount financed unknown. As I said they are asking $199,900 but that seems high to me for the area.

No known repairs and both units were updated approximately 5yrs ago.

2014 taxes: $4,100

Insurance: $2600

Water: $600

Yeah, that is a terrible deal.  You will lose your shirt.

You're talking about PITI of $17,000+ a year, with scheduled rents of less than $21k.

I don't particularly subscribe to the 50% and 2% "rules" advocated here, but becoming familiar with them would do you a lot of good.

The 50% rule basically says that expenses will amount to 50% of your schedule rents (expenses include taxes, insurance, maintenance, some saving for capital expenses, water/sewer/other landlord provided utilities, vacancy, and property managment.)

The other 50%, minus principal and interest payment, is your cash flow.

Now, as I said, I don't fully subscribe to this approach.  But as a general rule of thumb, it does seem to play out.

In your case, assuming 20% down and the balance financed at 5%, you are looking at $858 a month in P/I payments.  And 50% of your scheduled rent is 837.50.  Leaving you with a cool negative 20 dollars in monthly cashflow to show for your $45-50k initial cash investment.

thanks for the advice Richard. The realtor is telling me she made a mistake and the NOI does include PITI. She is going to confirm with me later today. Obviously if this does include PITI it would change the value of the deal.

Even if it does include PITI would you see this as a good or bad deal and why?

Thanks for all your help.

No. For the reasons above. Your expenses will total around 10 grand. Your P&I slightly more. You lose money buying at anything like that price. 

I really encourage you not to think in terms like gross income, NOI, CAP, etc. You are over complicating the fundamentally simple act of buying a single small building as a residential rental. Try hard to come up with reasonable estimates of expenses and carefully figure out what you can actually pay for your duplex.

Thanks Richard. I simplified this and here is what I come up with. Can you confirm?

200K buying price with a 20% down @ 5%

Finance price of $160K ( I used round numbers for the example, I know I didn't factor closing cost)

P/I = $859 monthly,  $10,308 annually

Expenses = $775 monthly,  $9297 annually

Gross income = $1,675 monthly,  $20,100 annually

Total monthly income = $1,675  Total monthly expenses = $1,634

Total NOI = $41/month

$41 is hardly worth my initial $40,000 upfront investment or the monthly chores of being a landlord. At $41/month profit it would take me 81 years just to recoup my down payment. PASS!

I think one reason that may be a poor rental property is the size of the lot.  Land generally increases significantly property values, but has a small(if any) increase in the rental value.

the lot is large. The duplex sits on 1 acre if land which is increasing the taxes. It's also in a flood plain which makes no sense because there isn't a stream or lake for miles.

In flood prone areas, you will need to account for flood insurance in your estimates as well. If you know for certain the property, or at least the physical house, would not see water during a 100 year storm, you could have a survey done as part of the inspection to confirm the elevations throughout the property. Take these elevations and compare to FEMA flood maps to have the flood insurance requirement removed.

thanks Drew. My parents did this on their home and it worked. Saved them a few thousand a year.