Analyzing my 1st deal, am I being too conservative?

8 Replies

First post!  I am analyzing my first property in Louisville, KY. It is a triplex.

Here are the numbers I am getting. It looks like CoC of just 4%, but am I missing something?

The numbers are the "actuals" (per sellers agent), but the maintenance/CapEx(10%), vacancy(5%) are estimates.

The property is in an up and coming area that is revitalizing. The building has already been updated.

Am I being too conservative on these? It doesn’t feel like I am.

Price 175000
Gross rent 26100
Insurance  3156
Taxes 2535.96
CapEx + Maint (10%) 2610
Vacantcy (5%) 1305
Utils 6300
Mgmt 1827
Yearly Expenses 17733.96
Yearly Net 8366.04
CoC Return (no debt) 0.0478059428571429
Debt service 11700
CoC + Debt -0.095256
Rent per door -92.61

@Clark Zoeller if you are using ‘actuals’, you aren’t being conservative. That being said, your insurance number seems a bit high. 

Regardless, I want to address your last few lines. The CoC (no debt) appears to be a Cap Rate. You can do better than this here in Louisville.

Since the above is a based on a pure cash purchase, I’m not sure why you have debt service.  If you are getting a loan, the cash on cash calculation should be based on your down payment not the purchase price. That being said, it absolutely should not be negative. It’s too easy to find better deals.  

@Clark Zoeller This isn't a ton information to go on but it seems several of your numbers maybe need to look at closer. I agree with @Erik Hitzelberger that the insurance seems high. I would also look at the Mgmt expenses since they seem low. Do/are you going to use the current property manager? Also, you have to pay the utilities for this property? Paying for your tenant's utilities can make having a profitable real estate investment harder. Overall with the information given, this doesn't really seem to be a property I would consider purchasing. 

Thanks guys!  Yes, the market has been better than this lately, I am passing!

Are the units submetered for gas water and electric ? can the tenants pay their own utilities? If so that increases your cash flow significantly.

Yeah, what @David D'Errico said above.....

With utility expenses over $500/mo, you either need to find a way to sub-meter or implement a modified RUBS system. 

Even in our 23 unit we just finished remodeling, they pay all utilities except shared water and trash, so we added on a $39/mo per unit charge for flat water/trash costs and will break even on those that way.

And yes, insurance should likely be half of that. I'm in Cinci and know Lexington and Louisville well.  I have property in both right now valued much higher than $175K and I don't pay that for insurance.  More like $120/mo on my $350K building.  

I would agree with everything said above. Insurance looks double or more of what it should be and utilities of 525 a month seems odd as well. Water on a triplex should end up being 100 or so a month. I tend to pass on properties if they are not separately metered for gas and electric and maybe that's the case here. Also rent vs purchase price seems low as well so I would pass, unless this is a super prime area, St Matthews, Highlands, Germantown etc. For the crazy prime areas it's more an appreciation play vs a cash flow play. I do think appreciation/paying off the mortgage is where you get the most wealth but it depends on your strategy. I try to mix my properties up between the two. Of course ideally you get both in one property but that's tough to do unless its an off market deal or you predict the right area and get in early. Either way you are asking the right questions and doing due diligence so i'm sure your first deal will turn out well. Good luck!

Paying water is fine, but I would never consider a property where I had to pay gas and electric, it's a nightmare waiting to happen.  Have a plan (and the costs) for sub-metering or don't do it.  

Are these 2BR 1BA? Looks like rent is about $725 / month per unit. If you decide to submeter, how high can you go with the rent? Can the area/building support an additional $100-$200 in rent per month?

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