@Nate Wilson-
I agree with @Walter Key and @Jay Hinrichs, the 50% rule is good, and the 2% rule, well, not so much. Here's a link to a post I wrote where I explain exactly why the 2% rule should be used with caution, if not stricken entirely from your memory:
https://www.biggerpockets.com/forums/88/topics/254...
As far as the 50% rule, you can justify your own numbers all you want; just remember that 50% OER is tried and true over the years so if you think you'll do significantly better, you better run the numbers or you may be setting yourself up for a surprise. It's a good safe place to start an analysis and make sure you're covered. If you want to delve deeper and be more accurate, here's a breakdown:
Potential Rents: $24,000
Vacancy & Credit Loss (5%): $1,200
Gross Operating Income: $22,800
Repairs & Maintenance (10%): $2,280
Management (10%): $2,280 (Even though you'll likely manage it yourself, you should include this because 1) Your time has an opportunity cost, 2) If you grow your portfolio you may eventually hire out management, and 3) It's simply how the analysis is done, don't reinvent a wheel that's already round)
CapEx / Replacement Reserves (2%): $456 (This is something that you would likely leave out of a pro forma when selling your property, but a bank would include it in the underwriting analysis, and I suggest you include it when analyzing as a potential buyer. Also, many would argue that it is low at 2%. I have full-time employees doing my renovations and repairs, so my costs are less than an investor who hires contractors. You might want to bump this up a bit).
Real Estate Taxes: $3,900 (BTW, the town has this property assessed at $174K. I own property in Weare and I know that the tax rate is $22.41. I do not know the equalization rate though, so I can't say how that assessment jives with the $200K purchase price. I wonder though, has it been reassessed since renovations, or are you facing a higher tax bill after reassessment? Something to consider, because a reassessment at $200K would boost your tax bill $582).
Insurance: $1,000 (This is an estimate based on duplexes that I own, but it may be a little light because I have $10K deductibles, something your lender will not allow).
Total Operating Expenses (43.49%): $9,916 (This does not include vacancy. If you include vacancy to get something comparable to the 50% rule method, your numbers become $11,116 or 46.31%). Also, the OER and 50% Rule DO NOT include debt service.
Net Operating Income: $12,884
CAP Rate: 6.442% (I don't know if this is a good CAP Rate right now for duplexes in Weare. I focus on single family homes when we're on the way out of a down-market. However, maybe a local Realtor could let you know where current market CAP Rates are ranging for small multi-family properties).
Last thing to determine is cash flow. Backing $3,900 for taxes, and my assumed $1,000 for insurance out of your $1,100 monthly PITI estimate, leaves $8,300 in Debt Service.
CFBT: $4,584
DSCR: 1.55x. (This is not bad, but current DCR's tend to be higher because interest rates are so low).
I don't know your downpayment, but here's one more piece of advice: Calculate your Cash-On-Return based on your downpayment and any other out-of-pockets. Also, project a gameplan into the future, and calculate your IRR for a few different scenarios (sell after 5 years, 10 years, 20 years, whatever scenarios you think are most likely). If you don't know how to do these calculations, buy a book and learn, because you have no business investing in real estate if you can't accurately calculate (and comprehend) financial analyses such as NOI, OER, CAP Rate, ROI, DCF, and IRR. Knowing these will replace the subjective and often emotional decision-making process with an objective and analytical one, and may just save your arse.
Overall on this deal, the numbers look decent. I wouldn't touch it personally because I'm a value-add investor (meaning I would have bought it for $100K in terrible condition and put $40K into it to make it worth the $200K), but that's just my strategy. If your strategy is to purchase turn-key, this deal may be right for you. Whatever you do, at least run similar analyses on other comparable properties so you know you're making the best investment available.
Happy investing,
Troy
