First time posting one of these. Help me analyze this deal?

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Andrew Kerr · Answer

Hi @Zachary Critchett - here are some thoughts, but keep in mind I don't have a lot of context.

If you just go by what you have, the numbers don't work on the 50% rule. If you go by the estimate CoC, you are getting 9%, and a total return over a 10 year period you are at 20%+, which for a lot of folks is pretty good.

Now, here are some thoughts on your numbers:

The amount down for the loan amount seems low, about 10%. If this is going to be a househack where you live in one side and rent the other, then you can probably get that for financing. If it is going to be a pure rental, you will probably need 20% down.

5% vacancy might be too low. It basically means you will only have one down month in a 24 month period. Generally, when a unit comes vacant, even if you hustle, it can take a week to do a turn around, then you need to find a tenant, and get them placed. And generally most tenants are not ready to move in that weekend. They tend to plan ahead and want a lease to start in a few weeks.  Its easy to loose a month if not more when turning a unit. Since it is a duplex, and the area might have better vacancy than this, but for budgeting, I like to  use 7-8% vacancy for underwriting.

5% Capex - it mentions "Newer", but I would really dig in and see what major systems will need to be replaced in the next 10 years, and back it out from there. You might realize you need to budget higher than 5%.

5% Repairs -same thing, even if it is newer, you are putting away 5% or $110 a month. Having to replace a frig, or a hot water heater can kill up to a year of this. Also think about turning a unit, doing repairs after someone moves out (think patching holes, touch up paint, basic landscaping) can easily run over $1,000. Think about going higher around 8%.

8% Management - while you can probably find a PM to manage the unit at 8%, keep in mind a lot of PM charge annual fees, lease up fees, lease renewal fees, etc. This can really eat into cash flow and make that 8% actually be 10% or more.

Those are my quick thoughts.

John Leavelle · Answer

Howdy @Zachary Critchett

I understand you may not like the 50% expense thing.  With your numbers it gives you negative cash flow.  However,  there are many experienced investors who have shown over time the 50% number is pretty close.  Unless you intend to only hold the property for a shorter period (say 5 years) I would definitely plan that way.  If they do not occur you make more profit than planned.  But if they do you are covered.  Once you develop an appropriate cash reserve it can be adjusted.

You did not explain about the 10% down payment.  What type of loan product are you planning on?  Conventional investment loans usually require 25% down payments.  With a bigger down payment (25%) your cash flow will increase some.

Thomas S. · Answer

As Andrew noted your expense estimates are too low. You should prepare for 50%  and hope you are less but don't base your calculations on being lower. Starting out make sure you have sufficient reserves, minimum 15K, and top it back up as you use it. One bad tenant can easily approach 20K in damages and you need to insure your expense calculations are based on the life of the property not just the next 12 months.

Jerson D. · Answer

id feel good with what i saw if it was a 2 family atleast, i tend to want higher down payments closer to 60k  and keep rent lower than avg to reduce vacancy's but ud have to keep it at 2.2k to make any money. don't really know your area but 200ish profit per month doesn't work for me. so putting that into effect not sure about this one. i look at things a little simpler, it either makes a great amount per month or i keep it rolling. (great for me is $400+ but that costs me 30-40% downpayment and self managing)

Zachary Critchett · Answer

@Thomas S.

50% seems like a bit much but I understand your point. I have a good understanding of the market I'm in but it's always good to have a plan. I appreciate the reminders and caution to expect the worst and hope for the best.

Zachary Critchett · Answer

@Chris P.

Thanks for the input. I appreciate the feedback

Chris P. · Answer

@Zachary Critchett

While I do not know your market and am still relatively new to investing myself, I would double check your numbers when it comes to property management, vacancy, and repairs. I use 12,8,8 respectively. They may be lower in your area, but make sure to calculate them properly especially when putting that much capital behind a project. I always calculate my expenses at the high end and if my numbers still work then its a go, because anything extra is just icing on the cake.

Zachary Critchett · Answer

@Andrew Kerr Thanks a ton for the insight! I'm in Central Oregon which is one of the hottest and fastest growing markets in the country and that has a lot of people feeling optimistic, but I like what you said about those extra expenses and how quickly they can add up. I'm all about leaving lots of cushion as a sort of insurance to make sure I keep myself relatively secure so I'll keep in mind possibly raising those percentages a bit. Thanks again for your thoughts.

First time posting one of these. Help me analyze this deal?

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