Should I buy this triplex in Kearny?

Question

Hello All:

My question is this:  am I fooling myself by thinking that it's still a good deal even if the cash flow is -$212/month, and the Cash on Cash ROI is -3%, because I probably won't need the 10% property management fees?  If I take out this 10%, I get $100 cash flow and 1.3% CoC ROI.

Details:

I'm looking at a 3 family home in Kearny, New Jersey.  I offered $270K, and was countered at $310K.  There are 2 other offers, and I was told that I need to offer at least >$300K.

So let's say I purchase it for $305K.  The gross rents are currently $3000, I believe I could at least get $3100.  It looks like there won't be much need of repair -- I estimate $5000 at most.

All the utilities are split out for the 3 units, except for water, which is $200/quarter.

If I estimate 10% Vacancy, 10% repairs and maintenance, 5% capital expenditures, and 10% property management fees (I will mange it myself), I get NOI $11,362, cashflow -$212, CoC return of -3%

I believe it's in a good location/neighborhood, one that I wouldn't mind living in, and it's close to Newark Airport.

I would really appreciate your thoughts.

Michael Le · Answer

@Henry L., the cash flow amount should depend on the purchase cost. That's why there's the 2% rule, which states that should try to get your cash flow to be 2% of our purchase price. It's a percentage because $100/door cash flow is good if you paid $50k a door but bad if it's a SFR home that cost $1 million. That 2% rule is not always going to work depending on where you buy so some people do 1%. Even at that number the rule states the property above should be cash flowing $100/door. And if your number is coming out to $100/m that's only $33/door. And that's with no management fee which I don't believe anyone advocates. Even if you plan to self-manage, you have to put a price on your time.

Michael Le · Answer

Hi @Henry L., you didn't say how much your tax and insurance was but based on your other numbers and the NOI you said you would have, I guess it's around $11,200 for both. Is that right? Is that realistic going forward or might it increase? Are you sure there are absolutely no other expenses? No common area  expenses like lawn care or garbage? No HOA? Do you have closing costs and holding costs factored?

The 50% rule says you'll cash flow $335/m (1%). Granted it's just a rule of thumb but that's a $500/m spread in the two methods. Even factoring 10% vacancy into the 50% rule to make it based on collectible rent, it says you'll cash flow $185/m. Not sure what to think there.

If this is your first deal, maybe you should pass and wait for more of a sure thing?

Russ Draper · Answer

Your first paragraph says it all.  Why are you even considering this?  Just because the deal is near where you live?  Buy something out of state if you have to, but don't buy a bad deal!

Henry L. · Answer

Agree - thank you for helping me make this decision, I won't be putting in a counter-offer.  Also, thanks for the tip on putting a value on my time.  I guess I figured I'm just learning, so any time I put in is important to help me improve, but that may not be the case in the future.

Thanks!

Henry L. · Answer

No, I won't be able to live in one unit and rent out the other two.  I will remember that:  CF is King.

Henry L. · Answer

Hi @Russ Draper and @Michael Le, thanks for your replies.

I'm not sure it's a bad deal -- I think that it's a real nice property, with minimal repairs needed. But I guess what you're saying is that if it doesn't cashflow that much, it's risky.

The annual tax is $9612 and the insurance is about $2400, so it's about $12,000 - you were pretty close.  I've heard that I can get the insurance down to about $2100, not sure about the taxes - it may go down.

As for other expenses like lawn care, I built that into repairs and maintenance at 10% of the monthly rent - is that not enough?

No HOA.

The closing costs, I think I overestimated, at $8800 -- I used BofA's closing cost calculator, but my realtor estimates closing costs at $3000.  Who's closer to reality on this one?

I just re-did my numbers on the BP Calc -- looks like I'd cash flow ~$100/month with no management fee.

At which point do you think I would have more of a sure thing, if I cash-flowed $200/month?  $300/month?  I thought I heard on one of the podcasts that $100/door or unit is a good goal.  So I guess my goal here would be at least $300/month?

Should I buy this triplex in Kearny?

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