small 2 family rental deal analysis
Hi folks, first time posting here, I am currently looking at a very affordable rental property, I have looked over the numbers but would love your feedback. I have this nagging feeling that I am being too optimistic on my numbers.
2 family unit, first floor is 1 bedroom 1 bath, has access to basement. 2nd floor is 2 bedroom [1 bedroom plus renovated attic], with small balcony in the back.
The whole house is ready to move in, the current owner did a great job, recently she lost her husband and lost heart in owning this house.
Asking price is $65,000.
This is a small town in PA, population had been stagnant in the last 10 years, only 2% growth. A mid to low income town of 28,000. The block is quite nice and quiet, short driving distance to downtown. Most single fam around here are going for 50 to 70K, but the sales prices in the last 10 years had been pretty similar.
Electric and water meter are separated [paid by tenants], only issue is heat is gas, and it's not separated, so I'll have to built that into the rent.
Other similar rentals on the block are asking around 750 to 850 where tenants pay for all utilities.
So my analysis:
Rent at: $850 include gas heat [costs 100 to 200 per month average out one year] one garage space $60
Rental income: 1760 [annual 21120]
vacancy rate: 12% 211.2 [2534.4]
net rental income: 1548.8 [18585.6]
Gross income: 1461 [18585.6]
Property tax: 2661.29
insurance: 800
property and repair: 20% $3717.12
Gas and heating: $2000
annual total expenses: $9178.41
NOI: $18,585.6 - 9178.41 = $9407.19
Cash Flow = NOI – Debt Service:
$5953.71 = 9407.19- 3453.48 [30 year, 10% down 4.25%]
$4126 = 9407.19 - $5281.08 for 15 years same terms
Cap Rate = NOI / Property Price
Cap rate: 9407.19/65000 = 14.47%
Am I missing anything? Thanks a bunch for your time.
It doesn't look like you allocated any funds to property management or a mortgage payment. I'm not sure if you plan on leveraging the property, but I would definitely account for property management in your analysis.
Hi Sean,
thanks. I put 20% under repair [property and repair: 20% $3717.12].
Should I put an addition 20% for management? It's a small place, I figure I'll do the management until I get tired of it. So should I be looking at 40% total expenses on repair and management?
Originally posted by @Henry Chan:
Hi folks, first time posting here, I am currently looking at a very affordable rental property, I have looked over the numbers but would love your feedback.
Cap Rate = NOI / Property Price
Cap rate: 9407.19/65000 = 14.47%Am I missing anything? Thanks a bunch for your time.
Where are your cap rate comps? If they're higher than 14.47% you'd be over paying for the property. Not very smart.
Henry,
Typically property management fees are 10% of the monthly rents plus 50% of the first months rent as a placement fee. That works out to roughly a 15% monthly expense if you spread the cost over the entire year. Its perfectly fine if you want to do your own property management. I would just evaluate the property management with property management included. It will give you a better idea of what to expect if you ever decide to unload the property to another investor in the future. At worst, it gives you flexibility to outsource the management if and when you please.
I see, of course the 15% doesn't take basic repairs into considerations? So I am looking at a 35% [20 % for repair + 15% management].
That should bring the highly optimistic numbers down a bit to planet earth; thanks!