Low Cap Rate and Cash Flow related Confusion?!

15 Replies

So, color me confused. For example, a duplex in Manchester, NH could go for $210k and both units could be rented for a total of $2,400 per month. That means the NOI could be $1,119.67, Cap Rate of 0.533 % and Cash Flow of -$99.33.... Here's the per month numbers I'm looking at with an FHA Loan for 30 years & 3.5% down payment at 4.85% interest:

Expenses:

  • Taxes: $391.67
  • Homeowners Insurance: $66.67
  • PMI: $150
  • Vacancy (5%): $120
  • Repairs (5%): $120
  • CapEx (8%): $192
  • Property Management (10%): $240
  • Mortgage: $1,219
  • (Tenants would pay for utilities)

And... like, this isn't even accounting for Lawn care or Snow removal...

Total Expenses: 2,499.33

NOI = $2,400 - $1,280.33 = $1,119.67

Cap Rate = $1,119.67 / $210,000 = 0.533%

Also, for the 1%, 2%, or 3% rule this comes in at 1.143% = $2,400 / $210,000

So, this is being generous, really. $210k is on the lower side and I'm assuming I'll take care of the lawn/snow.

I'm most confused at how this can really change in any one direction to make it meet the 8% cap rate or the 2% or 3% rule... like the only way I can see it meeting those is by jacking up rent or getting the house for free by a family member. *slams head on desk*

-Joe

@Joe Pearson

Cap Rates are only used on commercial properties 5 units and above. Not on 1-4 family properties.

1-4 family analysis uses cash flow.

Originally posted by @Joe Pearson :

@Christopher Phillips Ah, that would make sense. 

Tho, still, 1.143% and -$99.33 seems a little low or unrealistic...

Just looking at the first post...

Are you buying the duplex and renting out both sections? If that's the case, then you can't use an FHA loan. That's for owner occupied properties. You would have to initially live in one of the units.

FHA loans are for owner occupants only. They are not for investment properties

I understand. I intend on owner occupying for 1 to 4 years, pending on using HomeFlex Cash Assistance and any other life events. 

I'm calculating numbers for before and after owner occupy, both of which don't make much of any cash flow.

-Joe

You can use a cap rate on any property.  But you need to subtract the debt out.  It is a non leveraged metric.   Smaller properties in well located areas usually have a slight negative or neutral cash flow.  

Depends what area you're in, I bought a duplex for $230k with an FHA loan and once I move out, my total rent will be around $3,000 per month. I think the issue you're running into running the numbers like this is that with a 3.5% down payment FHA loan, your return on investment is low because you're not putting much down. If you looked at it as a cash-on-cash basis it might look a little bit better. Also, with an FHA loan you are paying PMI (mortgage insurance). Typically people are paying 20-25% down on an investment property, thus the monthly returns are higher.

Also, your numbers for home owners insurance and taxes seem a bit low. My town does have high taxes, but almost all of NH does. My taxes are more in the $500-550 range and insurances is a little over $100 per month.  

@Tucker McCarthy :

Oooo, a Milford duplex for 230k, was that recent or back in 2010 or something? 

The insurance and tax quotes I got were for Manchester. Also, i posted my cash flow, it's negative =/

I'm looking to buy in Southern NH. I've shifted my focus from specifically Nashua or Manchester to everything but Nashua and Manchester. 

Is 230k rare for Milford? 

Thank you! 

-Joe

Originally posted by @Joe Pearson :

I understand. I intend on owner occupying for 1 to 4 years, pending on using HomeFlex Cash Assistance and any other life events. 

I'm calculating numbers for before and after owner occupy, both of which don't make much of any cash flow.

-Joe

 Investors dont put 3.5% down to achieve cash flow. We put 20 to 25% down. You shouldn't expect a property thats nearly completely leveraged to cash flow unless its in the heart of the worst ghettos in the country.

@Joe Pearson it was in June of 2017 it was a pocket listing from a local realtor that I bought before it hit the market. I’ve found a few off market duplexes in Milford too, closing on my third next week. They’re out there!

@Russell Brazil , When you say cash flow do you mean like $300 per door? Exactly how much cash flow do you aim for?

With an FHA Loan and living in the building I'm thinking of cutting Vacancy by half because I'm living in it and removing Property Management because I am the owner and property manager.

@Tucker McCarthy , Have you done an FHA Loan and are getting cash flow?

Are you selling any of those? xD I'm trying to find one from the MLS listings - I need to branch out.

Thank you!!

-Joe

I could be wrong but I believe you forgot to multiple by 12 for 12 months of NOI earnings

Cap Rate = $1,119.67 / $210,000 = 0.533%

should be $1,119.67 * 12 months

Originally posted by @Joe Pearson :

So, color me confused. For example, a duplex in Manchester, NH could go for $210k and both units could be rented for a total of $2,400 per month. That means the NOI could be $1,119.67, Cap Rate of 0.533 % and Cash Flow of -$99.33.... Here's the per month numbers I'm looking at with an FHA Loan for 30 years & 3.5% down payment at 4.85% interest:

Expenses:

  • Taxes: $391.67
  • Homeowners Insurance: $66.67
  • PMI: $150
  • Vacancy (5%): $120
  • Repairs (5%): $120
  • CapEx (8%): $192
  • Property Management (10%): $240
  • Mortgage: $1,219
  • (Tenants would pay for utilities)

And... like, this isn't even accounting for Lawn care or Snow removal...

Total Expenses: 2,499.33

NOI = $2,400 - $1,280.33 = $1,119.67

Cap Rate = $1,119.67 / $210,000 = 0.533%

Also, for the 1%, 2%, or 3% rule this comes in at 1.143% = $2,400 / $210,000

So, this is being generous, really. $210k is on the lower side and I'm assuming I'll take care of the lawn/snow.

I'm most confused at how this can really change in any one direction to make it meet the 8% cap rate or the 2% or 3% rule... like the only way I can see it meeting those is by jacking up rent or getting the house for free by a family member. *slams head on desk*

-Joe

Ah, you are correct. So, that'd be

13,436.04÷210,000 = 6.4%

- Joe


Originally posted by @Adrian Stamer :
I could be wrong but I believe you forgot to multiple by 12 for 12 months of NOI earnings

Cap Rate = $1,119.67 / $210,000 = 0.533%

should be $1,119.67 * 12 months

Originally posted by @Joe Pearson:

So, color me confused. For example, a duplex in Manchester, NH could go for $210k and both units could be rented for a total of $2,400 per month. That means the NOI could be $1,119.67, Cap Rate of 0.533 % and Cash Flow of -$99.33.... Here's the per month numbers I'm looking at with an FHA Loan for 30 years & 3.5% down payment at 4.85% interest:

Expenses:

  • Taxes: $391.67
  • Homeowners Insurance: $66.67
  • PMI: $150
  • Vacancy (5%): $120
  • Repairs (5%): $120
  • CapEx (8%): $192
  • Property Management (10%): $240
  • Mortgage: $1,219
  • (Tenants would pay for utilities)

And... like, this isn't even accounting for Lawn care or Snow removal...

Total Expenses: 2,499.33

NOI = $2,400 - $1,280.33 = $1,119.67

Cap Rate = $1,119.67 / $210,000 = 0.533%

Also, for the 1%, 2%, or 3% rule this comes in at 1.143% = $2,400 / $210,000

So, this is being generous, really. $210k is on the lower side and I'm assuming I'll take care of the lawn/snow.

I'm most confused at how this can really change in any one direction to make it meet the 8% cap rate or the 2% or 3% rule... like the only way I can see it meeting those is by jacking up rent or getting the house for free by a family member. *slams head on desk*

-Joe

The first one I bought I did do an FHA loan yes I've been living in one of the units. The other two needed significant rehab. I am getting ready to sell one of them but it is occupied with tenants so you wouldn't be able to do an FHA loan

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