Too good to be true?

Question

http://www.biggerpockets.com/properties/13950-14-roi-on-this-duplex

I am a complete newbie but from what everything turns out to say, I sit on my butt and collect around $880 every month? Is this too good to be true? I hear a lot of property management horror stories but I really can not grasp the idea that it is too good? 14% ROI is high, no? Please send me some feedback! I'll try to contact the property management team also.

Also, if it is good, what are the outlooks on Tampa being a good place to invest in? I am young in this game of real estate but any hints (I know some of your investment secrets are just that, secrets) would be much appreciated!

Michael Lauther · Answer

Jason Lee You can invest out of state successfully but it will take a concerted hands on effort . You first have to become very familiar with the market and you initially must spend time in the market. second you must develop a reliable team if not a property manager at least a handyman and contacts for more complicated repairs. I have properties 700 miles away from Hampton Bays NY where I live and I chose a market in Dayton Ohio for the reasons you mentioned. Even with today's depressed prices the NY city market is hard to enter without substantial cash.

That being said, those who warned you not to invest long distance are correct, it will be a challenge but the rewards are worth it in my opinion.

Check out the 2% rule and the 50% rule, while they are really just guides they are a good place to start.

William Donaldson · Answer

Jason:  Do NOT try to get into REI in a market far away from you (one hour-two hours+).  Definitely do NOT get into real estate investing in Florida when you are in NYC!  Like Uwe said, try other markets around NYC.  Could you live outside of NYC and commute while building up your investment portfolio?

There are some amazing deals to be had where I'm from, South Carolina, but I wouldn't recommend these deals to an investor from far away!  Unless you have a partner that you've known for a long time and can trust, investing out of state will be a guaranteed nightmare!

Good luck!

Uwe S. · Answer

Jason,
last week I gave an other member from NYC same advice: Check some bigger towns with max 1-2 hours trip from NYC in PA, NJ or NY. You will find definitly some opportunitys there.

-Uwe

Jason Lee · Answer

Thank you everyone for your replies. It is quite hard to get started locally because I live in NYC. I really have to look harder at other markets. Although NYC is great at filling homes, it is so hard to get to that level with the amount of money you need to start with. I'll have to go back to the drawing board and come up with different ideas and plans I guess. Once again, thanks everyone!

Mark H. · Answer

Welcome to BP, Jason!

Actually, the biggest secret is that there are no secrets.  Buy low, rent high, minimize expenses.

Regarding the deal posted, this seller, like most, has an agenda.  The roi mentioned might be nice, but isn't likely long term, because the seller is leaving off a couple of key items - maintenance (beyond mowing the lawn), and vacancy.  Among investors, most tend to specialize - sfrs, duplexes, and apartment buildings are three distinct animals - they appeal to different types of tenants, and the tenants kinda control the maintenance, management, and vacancy expenses.

In my area, a $550 per-unit rent indicates you aren't going to be getting doctors, firefighters and cops as tenants - you'll be getting those people who are hanging on by their fingernails economically.  Tampa could be different, but I'd doubt it.  The general consensus I've heard from those that owned duplexes in my area, is that they're more difficult to keep rented than sfrs, long term.  That means you'll be paying lease-up fees & rehabbing between tenants more often than a similar SFR.   The bottom-line "rule" for sfrs is that your expenses are going to be about half the gross rent over the long haul.  I'd expect that to be higher on a duplex.

Long story short, to look at the ad with a jaundiced & distant eye, I'd be suspect about "management & lawn care" at the price quoted - around here, management for a single unit would be 10% of gross rents, and they might even nick you for lease-up fees between tenants.  Around here, mowing a lawn 4x a month is gonna cost you $100, unless you have a bunch of them.  Maintenance is not going to be $0 a month on a 1974 low-income duplex, managed by a low-buck management company.

I'd be very surprised if you actually put $4 - 5k in the bank every year with a deal like this - that's a guess from afar, just based on what I've learned managing only a few rentals on the other side of the country.  Someone who lives in Tampa & could manage them themselves could probably do a lot better than that, but if you want to hire everything out & just collect checks, they aren't going to be 14%.

Uwe S. · Answer

Hello Jason,

yes too good to be true! There is no maintenance fee involved actual and thats true there will be any maintenance!!
Calculate with $550 NOI each month = $6,600 NOI each year. With an 10% CAP price should be $66,000 not $80,000.

-Uwe

William Donaldson · Answer

Unfortunately it is too good to be true.

---NOI is overstated because you are not accounting for expenses from the basics (paint, cleaning, etc.) to the expensive (roof, hvac, electrical, etc.).

---NOI is overstated because vacancy isn't accounted for.  Go with a 10% vacancy number to give you an idea of lost income.

---Taxes and insurance on this duplex seem very low.  $~1.2k in taxes AND insurance per year for a $80,000 property?  I don't think so.  I bet the taxes are also calculated based on owner-occupied (you living in one side).

---You will NOT be collecting $880 month to do nothing.  Remember you will be paying principal and interest on the loan, around $450/month.  This drops you down to $430 a month IF you have NO expenses EVER and you NEVER have a vacancy!!  Remember the taxes/insurance are probably understated.

Based on the numbers I ran in my head accounting for vacancy, repairs, reasonable PITI, etc. it looks like you wouldn't be cashflowing too much on this property that is almost 40 years old.

The seller would have to come down a very large amount for this to be a good deal.  I'd pass on this one.