What do folks think about this potential deal?

Question

Hi Everyone - my first post on BiggerPockets, but have been following the forum and podcasts for several months.  Have a potential deal at hand and was curious what others think about the financial profile, returns, and anything I might be missing.

Here are the key stats - based on quotes and research.

Location: North Jersey, 15 min outside the city with public transport options - heavily populated and rent heavy neighborhood.  Working class with demand picking up.  Prices have come up though over past 2 years, so not buying at a low by any means.

Purchase Price: $600,000

2 family - average / slightly above average existing condition

Total Monthly Income (Rent + Parking spot):  $4,400

Mortgage + Tax: $3,300

Water / Sewer:  $900 a year, $75 a month

Insurance: $1,200 a year or $100 a month

Utility expense paid by me: $50 a  month, rest paid by tenants

Lawn / Snow: $50 a month average

Unexpected Maintenance:  $100 a month

Total net monthly cash flow of $725, Cash on Cash Return of 5.2% (based on down payment, closing costs, and assumed $15,000 investment in units to upgrade)

Not a staggering return but seems to be cash flow positive and should be stable.  Maybe some appreciation but not banking on it.   Any thoughts?

Chris Monello · Answer

Thanks all!  Yeah, it feels a bit expensive.  Crunching numbers on a lot of deals in the neighborhood and seem to be hard to come by.  Haven't made any decisions just yet, so appreciate the feedback!

I manage my own properties, and do my own book keeping, but hear you on the potential vacancy expense.   Certainly need to factor that in and agree, 100% walk away from negative cash flows.

Chris Monello · Answer

Appreciate everyone's feedback!  I don't agree with all of them, but appreciate none the less!

Justin Schaefer · Answer

@Chris Monello it would behoove you to get a pro membership here on BP because you can listen to the webinar archive then and get a very clear instructions on how to do your numbers.  You'd also have unlimited access to the BP calculators which are awesome!  This deal could generate you a very small amount of cash flow if you put down at least 20%.  Putting $120K down on a duplex seems quite excessive.  On the other hand, you also probably don't know what the current owners situation is.  You could always send in a low ball offer and see what happens.  They could bite.  I would strongly encourage you to go pro and play with the numbers on this one to see what you can afford to offer them, and then offer a bit below that so you have some wiggle room if they do bite.  Best of luck to you!

Kelly Arthur · Answer

@Chris Monello this is not a deal. I think you really underestimated your expenses. Get a good rental calculator to run the numbers. The BP Rental Calculator is really good. Also, make sure you have good numbers for your expenses by calling around and factor in vacancies and  CapEx.

Ben Wilkins · Answer

@Chris Monello - even with a conservative estimate, I'm calculating a negative $300 / month cash flow on this property. But hey! That's how you learn, right?

As far as 100% walk away from negative - that really depends on any value add opportunities as well as how much other cash flow you have that can cover the negative. Later down the road you might consider a negative cash flow because of potential value add that you can bring to a property. That's exactly what a fix and flip is, correct?

You might find a duplex with no current tenants, so it would have a negative cash flow. However, you might be able to rent it out for a good chunk of change if all you do is split the electric for example. This might be a good case for purchasing a negative cash flow, as long as your income can cover the negative until it starts flowing.

Michael Lee · Answer

Hi @Chris Monello welcome to BP!

Looking at the numbers you provided, this deal looks expensive. If you look at the rent/price ratio, its less than 1%. You mentioned you will need to put 15k each unit to upgrade, so you ll be in it for ~ $630000 to make $4400/mo. It's tough but I'm sure you can find some deals that are 1%+ in Union City. If I am looking at this deal purely based on numbers, you can definitely find some better. Good luck!

Thomas S. · Answer

No way to achieve positive cash flow on a $600K property with rents at 4.4K. Your expense calculations are way too low and you have left out many expenses like evictions, vacancies, utilities when vacant, legal, accounting, management, advertising, etc.. etc. Expenses alone will run you minimum 30% possibly 50% of income.

It is a negative cash flow property. Walk away.

Eric Waterman · Answer

have you set aside any money per month for future capital expenditures (CapEx)? That's your roof, mechanicals, or other larger improvements.

What do folks think about this potential deal?

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