First Time Investor - What do you think of this deal?

Question

Hey everyone, looking to invest in Multi Family Units in the Atlantic City, NJ market.  Came across a duplex in a neighborhood that I like which I think has some potential.  Well maintained property, doesn't look like any major improvements are needed off the bat.  Studio unit and a 2br 1 bath.

Asking price is 79500, I estimated financing with 20% down and 5% over 30 years.  Also added 6500 for improvements and closing costs.

The property is vacant and the seller hasn't provided previous rental rates but I conservatively estimated 600 for the studio and 1000 for the 2br.  Put in vacancy rate at 10% although the neighborhood trends lower.

I also estimated expenses as follows:

• Insurance $1,000.00
• Taxes $3,300.00
• Property Mgmt 10% $1,728.00
• Maintenance $1,000.00
• Advertising $300.00
• Utilities $2,000.00
• Total Expenses $9,328.00

After all that I'm coming out with a cash flow of ~$3800, Cap rate of 10%, and ROI of 17%.

Am I missing anything?  Any thoughts on the deal as a whole for a first time investment?

Thanks for your insight.

Anthony Lee · Answer

@Christopher Tully for sure don't estimate on the insurance. It could vary greatly. Better to get real numbers and factor those in. If flood insurance is required, it could eat up your ROI but depending on the exact circumstances there may be options.

Kurt Kwart · Answer

Hi @Christopher Tully. Im local and invest in the city.

You will need flood insurance if you have a mortgage. Did the house flood in hurricane sandy?

I would guesstimate your insurance costs around $3000/year and flood continues to sky rocket (especially for non owner occupied). I try to avoid flood insurance with other types of non secured loans or someone holding paper vs a conventional type mortgage

We are having a REIA meetup in Atlantic City on August 10th https://www.biggerpockets.com/forums/521/topics/329286-atlantic-city-nj-real-estate-networking-meetup

Wouldn't it be cheaper and easier to house hack into something?

Les Armour · Answer

Hi @Christopher Tully, I am an investor in Atlantic City as well. There are properties that definitely have better cash flow, but if you think it is a decent neighborhood then it could work. I would say you most likely have to put 25%-30% down for a commercial loan.  I also agree with the insurance costs. If you are getting a mortgage on the property, you will be required to have a flood insurance. That can be pricey depending on where the property is. I would also say if you do move forward with it, be picky about who you rent it too! Good luck.

Christopher Tully · Answer

Thanks for the advice @Connelly Hayward , I'll be buying under an LLC so I should probably revise my rate up to 7 or 8% which would drop cash flow to 2.3 - 2.8k and ROI to 10 - 13%.

@Amit Patel as for point A, I believe this market is at or near the bottom and this neighborhood especially will benefit in the next 5 - 10 years from some upcoming development nearby.

As far as B - I'm unfamiliar with 'Actual collection rate', would you mind explaining?

Thanks for your input

Amit Patel · Answer

Before you do this, make sure you look at the big picture first:

A. Fast forward 10 years from now - Do you think this area will be viable 10 years from now. Is it going downhill or uphill ? If its down then no cap rate is worth it unless you are going to flip in a short time as longer term, prices may tend lower.

B. You may have 90% Occupancy but what will be your Actual collection rate in the area ?

If you can get that 17% without too much risk, it's Amazing. However, as with everything, there is often a catch. I have been doing this for only 3.5 years now. I was lured to these high cap rate properties before as well but found that they are only worth it if its in the right area. This has worked for me but I only have 3.5 years experience so others may have some better input.