First Investment/Rental Property - Check my Numbers?

Question

Hello all, new to the forums and just wanted to use the experts here as a sounding board for the deal I'm working.  This is my first investment property; up to this point I was all about investing in the stock market but I saw the light after reading Rich Dad Poor Dad!

So the property is a duplex built in 1997 (great condition) in Colorado Springs, total sq ft 2,804 with both units being 2bd/2bath w/ 2 car garage and great views of the mountain and Pikes Peak.  Projected numbers below, can anyone double check to see if I'm overlooking something?

Sale price: $437,500

Conventional loan w/ 25% down, closing costs, etc.: $112,927 so loan total is $328,125 @ 5.125% = $2,076/mo

Rents are $1,425 and $1,450 (soon to be $1,500) for a total of $2,925/mo and tennants pay all utilities

Property tax $1,358/yr

So taking into account 8% vacancy, $1000/yr maintenance, property tax, insurance costs, and no prop mgmt, I'm projecting around $600/mo in cash flow.

After listening to around 100 BiggerPockets podcasts, I almost feel like I'm overlooking something in the projection because so many people realize around $200/mo cash flow.  Can anyone do a sanity check on this for me?  Thanks!

Cameron Burke · Answer

Thanks for the input everyone, I have reconsidered my position on this deal.

Ryan Royal · Answer

Cameron, I pulled up the pending duplexes and I am assuming you are talking about the west pikes peak property?  Are you in Colorado Springs? Message me and ill give you some details on a 4plex that I am working to close on and some other numbers for you to think about on this property.

Bruce Scannell · Answer

Hi @Cameron Burke. Welcome to the party! Real estate is, in my opinion; more logical, predictable and all around fun than the stock market...IF you buy right. If you don’t, it can be pretty dang stressful.

So with that said, your $600/mo cash flow (if you get that) is only a little over 6% cash on cash ROI considering your down payment. That’s not very good since historically the stock market is closer to 8-9% annually, without much work from you, but the duplex will require some “work”. You mention others saying that $200/mo cash flow is good, but that’s relative to the initial investment. Is there a chance for appreciation for a duplex in your market? In mine, there isn’t, since the only people who purchase those are investors and don’t get the homeowner appreciation bump.

Also, I think that your estimate of $1000/yr in repairs is low. The duplex is over 20 years old and one new furnace or water heater is going to eat up your annual repair budget and then some. On top of that, one tenant turn is going to cost about $1-2k if new paint or flooring is needed.

I could keep going but this is just some food for thought, and hopefully helps you out. Good luck!

Bruce

Cameron Burke · Answer

Bruce,

Thanks for the input. I agree with you on all points.  The last few years I've been seeing great results with simply index investing (which I'm still continuing in multiple IRA accounts) so I guess part of the motivation for real estate was to diversify a little bit  (in addition to the REIT holding I have).  I feel there is a great potential for appreciation in this market.  Its in the Old Colorado City (some compare it to the next Denver or Portland with the "hipster"/millennial influx) with unobstructed views of the mountain range and Pikes Peak, which really drive up cost here.  But I was going into the deal without the focus on appreciation because I don't like to speculate too much on investments.  I know it's only about 6% ROI at this rental rate, but if trends continue, I should be able to charge upwards of $2k per unit in a couple years.  Plus comparable AirBnB rates would be around $150/night which would really boost my cash flow.

I am going to add into the inspection objection a point about the water heaters being original and likely to fail soon, along with full AC/furnace service in an effort to reduce the risk on those fronts.  Fortunately the carpet is new, so barring any disaster, I should be covered by tenant's deposit for any damages that occur in the future.

As far as financing, I feel l'm kind of limited since I'm not eligible for FHA or other owner-occupied options.  I wish I could "house hack", but the fiance and I just bought our home here a few months ago and she wouldn't leave our home to go back to an apartment.

Thanks again for the feedback!

Dick Stevens · Answer

It’s a terrible buy.  Cash on cash return is not worth the effort at all.  You stated that you could “charge upwards of $2k per unit in a couple years“... this is a very poor strategy.  Buy a property that cash flows today, never count on what might happen down the road.  Strategies like this is why so many landlords lost everything in the last real estate crash.  Maybe a few years down the road your rents will be even less, then your taking money out of your pocket each month to cover bills.

Gretchen P. · Answer

I am not familiar with the property but that 8% vacancy after the first year is high for the springs, my last one rented in a day, I figure 5%. That said, your other numbers are low.  I would suggest paying for trash, as some tenants won't and that's a nightmare.

You also need to build in 5% CapEx expenses for long-term big expenditures like roof, furnace, water heater. I typically figure 5% repairs, plumbing, electrical, 3% miscellaneous (tree trimming, gutter clean-out, landscape upkeep, lock changes, etc.)

That deal is tight.

Bryce Davis · Answer

Cameron,

I think you may want to run your numbers again.  I plugged your numbers into a little calculator I've built, and even if I assume $3k per month in rent, and $0 for insurance, using your numbers I get only $486 in monthly cash flow, not $600.  That drops your Cash on Cash ROI to 4.4%, which as Bruce pointed out is far from what most investors are looking for.

If you haven't already, I would suggest using the Bigger Pockets Calculators to double-check your numbers.  Just make sure YOU are satisfied with the numbers before making a decision.  https://www.biggerpockets.com/real-estate-investment-calculator

Bryce

Cameron Burke · Answer

Account Closed, can you elaborate?  Is it because of the 25% down?

First Investment/Rental Property - Check my Numbers?

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