SFR - What do you think?

Question

Hi,

I came across this home and ran some preliminary numbers using the spreadsheet that @Joshua Dorkin so graciously provided. I have attached a screenshot of the sheet and would appreciate your input. Thanks!

Ellis San Jose · Answer

Vacancy is low, if you have just one month per year of vacancy that's already 8%. If you use 2%,  you are expecting  roughly one week of vacancy per year.

If we do a quick & dirty analysis.

at 50% expenses of gross rent you get

$6,000yr or $500/month rent-$365/month mortgage payment

= $135 positive cash flow

ROI ($1,620/$48,000) = 3%

If you are at 40% expenses of gross rent

$7,200 or $600/month -$365/m mortgage

=$235 positive cash flow

ROI ($2,820/$48,000)=5.9%

Your cap rate is 5% at 50% expenses & 6% cap at 40% expenses

I agree with Matt Morgan, if this is for cash flow only then it doesn't look so great.

If you are placing a bet for appreciation, you have at least a possible positive cash flow.

Steven Hamilton II · Answer

Before even looking further into a property run the 50% rule.    If my ROI at that point is below 10% I won't even look further into the numbers.

Stephanie Dupuis · Answer

Keep at it and keep looking - have trust in the process. I had to look at over 100 properties with an agent (actually view them) before closing on my first. I'm trying to purchase another right now (will be my fourth property and my second rental) and I've looked at over 100 properties with my agent. I've lost count at this point at how many offers I've submitted.

Richard Mann · Answer

@Stephanie Dupuis - Thanks for the reply. I didn't put any property management in because it would have been my first "investment" property and I would have done it myself but I hadn't thought about paying myself to do it. Good suggestion. I think you are right about the legal and maintenance.

@Matt Morgan - You are ultimately correct the margins are too thin. Thanks for chiming in and taking a look.

@Ellis San Jose - Thank you for breaking it down on "paper." That was very helpful.

This home is right down the street from where I live and I was hoping that the numbers would be good because it would be easy to watch my first investment.

I will continue looking for investment properties but this exercise has definitely helped and hopefully the next one I bring will be better.

Thanks ALL

Stephanie Dupuis · Answer

I'd go back to your spreadsheet and:

1. Increase vacancy rate - 2% seems low to me. Most averages are around 4-6%. I like to put in 6% to play it safe, but vacancy is regional.

2. Include Off-sight management even if you plan to manage yourself. You may want to pay yourself a management fee or you may need to hire a manager at some time. Also, if managers in your area tend to charge 10%/mo, I add a few percentage points to this monthly amount because you must account for the contract renewal fees and vacancy renewal fees.

3. I'd put more of a buffer there for maintenance.

4. I always ad $300 for accounting/legal. This is for the CPA and any atty. fees that will eventually happen (evictions, notices, etc.).

Matt Morgan · Answer

If you're looking at this strictly for cash flow, I'd say the margins are too slim. You may want to research turnkey companies in places like Houston or Atlanta if you want a decent cash on cash return for little headache.

If this is more of a speculative investment being made in the hopes of capital appreciation, or maybe it's right down the street and will be easy to manage, then I'd say maybe you could do worse.

Richard Mann · Answer

Sorry, I see where the confusion was. The home information was the default listed when I downloaded the template

Richard Mann · Answer

@Joel Owens - This is not a duplex or a triplex. It is a single family home and tenant would pay water.

Joel Owens · Answer

Does landlord pay water?? Yes use 60% costs if NO use 50%.

12,000 gross rents / 2  = 6,000 NOI before debt service and even less if you pay water.

I think your cash flow before taxes will be much less than you think. So are you paying 120,000 for this tri-plex?? If so 1,000 in rent for 120,000 isn't the best. Your area might be cap compressed and it's the bet you can do there.

SFR - What do you think?

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