Are you sure sure that you’ll get that 2500 in rent ? Sounds like wishful thinking judging by the purchase price
Maybe its an AirBnB?
There are two apartments each 1546 square feet three bedrooms. In this area rents go for $1235 for a 3 bedroom apartment with nothing included and $1335 with heat included.
How confident are you in the rehab budget? If it's actually $50k, that will likely take you more than 1 month's time, unless you have some superstar general contractor who you've worked with before.
The expenses also seem a bit high. Specifically, I'm referring to the $500/month in property taxes and $300/month in utilities. I personally would never buy a duplex that didn't have separate electrical meters.
In Connecticut taxes are high. I am sure of the $6000 a year in taxes - actually will probably go up after rehab. And the utilities would be for separate owner's meter for the lights outside, in hallways and basement - and water which is a about $1200 a year per family. The thing I am unsure about is how high I should offer. I am thinking only $70,000. And yes I do have a superstar contractors.
Couple of my thougts:
Rents seem very fair for a duplex with 3 beds in each
Notice you dont have a down payment - how will you get a loan without a down payment for a rental property?
Closing costs are at 900 - seems pretty low, I would factor in more, something like 3K
Water/sewer seems high - I pay 300-400 per quarter for a duplex in CT
$25 / month for misc - who will take care of the lawn and snow removal? This is where I classify those items usually at least $100/mo
you should be able to get your insurance for lower - $150/mo would be reasonable
$200/mo for repairs might be high considering you are putting 50K in for repairs up front
Hard to say how much you should offer without knowing the market and property condition
I try to stay above $200 per door in cash after all expenses - unless i'm taking all or most of my initial investment out at refi
Hope thats helpful!
@Carol Labbe looks like a home run deal in Connecticut. Ensure you have enough wiggle room and confidence in that rehab budget.
@Dave Grimson. Thank you for the detail. I didn't list a down payment because I will use my personal HELOC then switch over to a investment property HELOC or loan with no closing costs but maybe an appraisal if needed.
Hi Carol, I don't see a budget for a property manager. How are you planning to handle applicant screening, tenant relations, rent collections, property maintenance, etc.? It seems like you've already thought through this deal pretty thoroughly, but I mention PMs because I've heard many folks on the BiggerPockets podcast mention how a good property manager is often the most valuable member of their deal team. It looks like this deal would still be solid even if you budgeted an extra 8-10% expense for one, and doing so might help you avoid a lot of headaches. You could even involve them in the property search itself. An experienced PM will have unique insights on which parts of town to focus on.
Best of luck with this deal. :-)
@ Richie Thomas. I am debating whether to use a property manager. After paying a property manager, I don't see any cash flow. Around here they charge 10%. I know dealing with renters is a headache. I am trying to justify even doing this? Is it really worth it?
My mistake, I was looking at your pre-refi numbers and subtracting 10% of your expenses. If I do the same with your post-refi numbers, then you're correct about the cash-flow.
I'll preface my advice by saying I'm still looking for my first property, and that my only qualification right now is being extremely cautious, analytical, and detail-oriented (bordering on OCD, see the reports below). So take what I say with a grain of salt. That said, if it were me looking to cut costs somewhere, it wouldn't be on a property manager. If I manage the property myself, then I haven't bought an investment- I've bought a job (another quote from the BP podcast that I sometimes steal).
I was going to suggest pulling less out of your refi, but then you aren't covering the full $120k project cost. How confident are you that you'll need to drop all of that $50k on repairs? Could that be less? A lower budget for repairs would mean less money needed in your refi, which means more cash flow, which means more money for a property manager. Be careful not to over-rehab- a good rule of thumb I plan to use is that the property should be the nicest house on the block, not the nicest house in the city.
By the way, it's smart that you're pulling out less than 70% of the ARV of $225k that you specified. You're positioning yourself well in the event of a housing market downturn, since if your property is cash-flow-positive then you'll be less affected if the assessed value is *temporarily* underwater.
I ran a few of your numbers through the BP BRRRR calculator to try to reproduce them. Here's what I came up with as a baseline attempt to just re-create your report. I'm not sure what the $100 monthly difference is in the purchase loan P&I. I threw in a $40 per month budget for garbage and/or lawn care, so that's part of it. Here are the settings I used in that section, for reference, if you're curious.
I see the amortization timeline for the refi loan is 25 years. Next I tried bumping up that figure to 30 years, but it only gives you another $60-ish reduction in your P&I. We'd need at least $250 to get you a property manager.
I think it's great that you're budgeting a solid amount of 8% for monthly CapEx and Repairs. That's more than I see some folks in this forum budget. That said, given you're already spending $50k up-front on repairs, any chance you could bump those two figures down from 8% to 6% each? That gets us to $80 positive cash-flow per month, with a PM budget of $248 in place.
Just noticed property taxes are $500 per month in your area. I'm sorry for your troubles. :-) That's a huge part of what's making this deal so difficult.
If we factor in @Dave Grimson 's suggestion about water and sewer, and assume $400 per quarter, that brings it down from $200 to $133/month. Let's also factor in his suggestion of $150/month for insurance, instead of $200. Here's the result- monthly cash flow of $196, including your property manager. This obviously depends on whether we can get those numbers down to what Dave mentions. It would have been great to get you all the way back to $209 per month post-refi, but I still feel that this deal has been de-risked quite a bit with the addition of a PM. :-)
@ Richie Thomas you seem have a good grasp on the knowledge it takes for rentals. I also tried to bring my costs down, but I know my numbers when it comes down to taxes, insurance and water. The taxes are high, but I live in the "taxation state". As for insurance, I already got a quote for $2136 a year and that is bare minimum, so I rounded up. As for water, I know that my own family spends about $1000 a year - that expense can be reduced a little. And I have the loan in for 25 years because that is the maximum payback period for the heloc. Regular loans for investment properties are even shorter terms. The 30 year loans have higher interest rates, points and fees. I was wondering what to do about the CapEx and Repairs because there shouldn't be much since we are planning on making sure everything is in good condition before renting. Our rehab costs are mostly associated with separating out the heating system. Right now, there is only one big old boiler servicing the two apartments. And one 40 gallon hot water tank. The house has been used by only one family for many years. We also need some electrical done.
Thank you for the input. Sounds like you are doing your homework before finding your first property. If we decide to do this, I will consider a property manager.
Thanks Carol, I hope you can make this deal work. You've clearly done your homework as well. Another option you have is to start off with no property manager, build up the experience yourself, and then hire one later if you think it's the right play. You'll be in a better position to sort the good PMs from the bad, and in the meantime you'll build up first-hand data (as opposed to pro-forma) about all the line-items in this report.