Hello BP! I am in the process of purchasing a home in Kansas City, KS. My math says that I will make over 500/mo in cash after all expenses are paid. Here is the problem... I am paying 85k for this home, the comps in the area show the top top end being around 85k and I still have to put maybe 10k worth of repairs into the property. After my closing costs, down payment, and renovations, I'll be into the property for about $27000, with a loan of $72250, and the market value on the home I expect still around 85-90k. It will be cash flowing but I wont be gaining equity. Any thoughts on this? Bad deal? I'll give you the financial breakdown below.
Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes
7y
Whenever someone says they have an amazing cash flowing deal, but they are paying more than market value, I assume they messed up their numbers. Maybe you should start by posting your analysis to see if you missed something.
So if you put in $27k and (assuming your numbers are accurate) it is paying you $7848/year, that is about 25% cash on cash return. In 4 years, you have 100% of your money back. I'm guessing that is a 30 year amortization, which means that in 30 years you will have 100% equity with someone else paying the mortgage, with no further investment in capital, and they keep paying you at the current market rental rate which is likely to only increase. And that is assuming that the value of your house won't increase, which historically tends to appreciate in most locations, which gives you even more equity. As long as you aren't planning to flip this imminently you will get your equity... plus cash flow every month.
25% is slightly better than a savings account! Sounds like a great deal!
Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes
7y
Whenever someone says they have an amazing cash flowing deal, but they are paying more than market value, I assume they messed up their numbers. Maybe you should start by posting your analysis to see if you missed something.
Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes
7y
Whenever someone says they have an amazing cash flowing deal, but they are paying more than market value, I assume they messed up their numbers. Maybe you should start by posting your analysis to see if you missed something.
Mesa, AZ · Member since 2019 · 49 posts · 14 votes
7y
I assume this is a duplex given the rent. And I assume you're local to the property and managing it yourself given there's no 8-12% line item for that.
Even if there was you're still talking a healthy cash flow.
If you've already gotten the rehab quoted at $10k and you know that's the cost then you're ahead of the game.
Your numbers look good! I just closed on a duplex and my numbers looked really good too, however, as soon as I closed I realized I underestimated my expenses.
For instance, If the sewer wasn't in my name and the tenants didn't end up paying it they could put a lien on my duplex, so I put that in my name which added about $50.00 to my expenses. Rookie move on my part but I just assumed all the utilities were covered by my tenants.
Also, I have a rental registration fee I have to pay the city. Another $85 but this is an annual fee, not monthly.
Will you need property management? I factored in 10% in my estimate and it ended up being a bit more with that with fees and everything else. It is closer to 15% after factoring in their fees that I will know I need every year (lease renewal of $350 total each year) However, these expense will be higher if I need evictions, or if I have a move out, they get closer $350 for a new lease etc. Luckily for this first year my tenants lease was already renewed. Guess I will cross this bridge when I get to it.
I estimated a bit higher for my cap ex and vacancy (I did 10%) but that was more a personal buffer and various things I have read on here.
I am cash flowing at approximately $350 per month for both units even after these expenses, and a roof replacement so I am still better than my goal of $100 per unit. My initial estimate was closer to $450 though.
I think even if you miss a few expenses you will still receive an amazing return with these numbers. Good find!
Rental Property Investor · Member since 2017 · 115 posts · 66 votes
7y
@Jacob Compton
Just to clarify. 85k purchase plus 10k in renovations. Comps however are 85k. The bank probably won't ok that after appraisal / inspection. Even though it does look like a 25%ish cash on cash ROI somethings not right. Either your comps are off or your numbers are inflated.
Have you signed already. If not I would go back to the seller with those numbers and at the minimum get the price down to 72k so in the event you have to unload you'll recoup your 10k / closing and broker fees if you sell at comp.
@Kevin Ledding Thanks Kevin! I will have the tenant pay all utilities, yes. I am even planning on making the detached garage into a mini coin-laundromat for extra cash flow. @Andrew B. I am pretty sure my number are accurate but I dont want to post the actual property address/listing. @Dante Feria I have about 10k worth of repairs @Daniel Bradley Yes this is a duplex. It was actually a SFH which a previous owner turned into a duplex.. Currently the thermostat/utilities all go under unit A but I am going to price out installing a new meter for unit B and getting them on a separate utility plan.. If I cant do that, I will pay all utilities and split it between the units. Also, yes, I am local. No property management. @Nicholas Simeone Thanks for the info on your experience... I will look into the rental registration fee (didn't know that was a thing) and the sewer. @Gregory DeRosso I actually estimate low on my rent. My rent I will try to get 550 for 1 unit and 950 for other.. 1350 is conservative. The unit is move-in ready at 85k but there are things that I want to update and finish ... I wouldn't live in it like it is although you could. I won't rent to someone else until the unit is looking how I would expect it to if I were to rent it. The bulk of that 10k will be to turn the deteched garage into a coin-laundromat and getting an electric meter installed for unit B and everything else that goes with that. 10k has not been quoted to me yet but I gave it a high estimate as well.
Blue Springs, MO · Member since 2015 · 481 posts · 313 votes
7y
Disclaimer: My rental and my experience are on the Missouri side of the KC metro. I don't know a lot about how it goes in the Dotte.
I was going to balk at the $1,350 rent if it was a single-family (you've probably got to be in Johnson County to get a SFR rent like that), then like everybody else, I figured out it was a duplex.
Have you checked your rent numbers against Rentometer and Zillow? Of the two, I like Rentometer a little better, because (it claims) it pulls data from actual "for rent" ads near your property, whereas Zillow's seems to be more automated and involve more guesses/assumptions. Without knowing anything else, I feel like getting $950/mo for one side of a duplex in KCK might be kind of a stretch. If it's out west, then maybe, but then the house would be selling for more than $85K. If it's closer to downtown KCK, I don't think the $950 is realistic.
You might try to get a quote or two from an electrician on the second-meter idea. Besides whatever BPU wants, you also may get to rewire a lot of the house to split up the two sides, especially since it used to be an SFR. In Kansas, my understanding is that you have to have an electrician to tie anything into the breaker box, so you can't DIY much, if any, of this job. My uncalibrated estimate is that you're probably looking at least $2,000 or so just to get a second service drop, second meter, and second breaker panel - and then you get to wire half of the house to that new second breaker panel.
You might also ask a couple of plumbers about the "laundry in the garage" idea. Getting electric and cold water out there isn't too big of a deal. Depending on how far away the garage is from the house, it might not be nuts to run hot water from the house to the garage - but then again, it may be a better idea to put a water heater in the garage just for the laundry, which means you get to run a gas line or heavier electric out there. Sometimes it freezes in the winter in KCK [citation needed], so you also get to install some kind of heater in the garage - whether that is electric, or gas, or even a radiator coming off of the water heater. The big deal, there, is probably the sewer connection. You can probably tie into the house sewer, but depending on where the existing sewer line goes from the house to the street, you might get to run your new line halfway around the house to tie in. You might also find that the existing line is super ancient pipe, and you might have to replace at least part of it so you can tie in to it.
They have that here in MN in some places too. Mostly college towns. Too many people turning an old 5 bedroom house into a by-the-room rental. Neighbors complain about all of the cars out front taking up all the street parking. Now you need a rental license and it states how many unrelated people can occupy the home.
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
7y
I don't see putting a laundry in the garage as a money maker (ever) considering the low amount of revenue generation and the high cost of getting water, electric and sewer hookups. Maybe rent the garage separately as a garage/storage? Is the property on a slab, basement or crawl space? If it has a basement or crawl, could you put washer/dryer hookups inside?
Since this property hasn't been fully converted to a multi family, you may want to run the comps as a sfr.
Spitting the utilities (if they aren't separated) may not go as smoothly as you expect.
A single thermostat that controls both units is probably not going to go over very well. Factor in separate HVAC in the future.
Rental Property Investor · Salt Lake City, UT · Member since 2019 · 23 posts · 8 votes
7y
@Jennifer Rysdam
Have you read about California and how they are allowing ADU's where they were outlawed before due to their housing crisis?
I am curious what some of those neighborhoods are going to look like. I used to live in Long Beach and worked nights. I remember when I first moved there I didn't have a parking spot and I would usually walk 7 blocks away simply because there was no spot for me to park.
I thought it was merely a cash grab for the cities, and an attempt to regulate properties that fall in disrepair, since a lot of the cities have inspections of the rentals too.
Or in my case, it says right on the form, that its for municipal tax purposes.
One of the really nice neighborhoods in Salt Lake City has a house that they rent to six different people and all the cars there is a sight to behold, I personally wouldn't want that in my neighborhood either.