good investment or not?

Question

looking at a duplex and triplex.  $300000 total
240,000 financed at 5% for 30 years = 15,460
taxes=2700
insurance=900
property management=6660
repairs/maint=2000
utilities=600
lawn/grounds=500
misc. =1500
vacancy=800

rent income of 36000

net operating=20,340
cash flow after debt service= 4880
taxable income after depreciation and add in principal payments= (751)

David Beard · Answer

Adam Happel - Your insurance sounds way too low at .30% of your purchase cost.

Taxes also look low, at .90% of your purchase cost.  Is your tax rate really that low there there, or will your taxes jump when the assessor resets the assessment to your purchase price?

You are way low on maintenance/turnover/capital reserves.  Those numbers are probably more like $5-6K/year.

You're computing PM fees based on annual turnover.  But if you have annual turnover your vacancy rate will be a little more than 8% (assuming one down month between tenants, which is standard, can easily be 2 mths for Sec 8).

If you put your numbers into this simple worksheet, you should get to some pretty realistic numbers.

http://www.biggerpockets.com/files/user/d1beard/file/buy-and-hold-analysis

Adam Happel · Answer

@David Beard - the taxes I'm not concerned about.  the tax rate in this area is really low.  Insurance I haven't looked into hard numbers but i'm sure they are low now that I look at them.  They said that vacancies have only lasted 2 weeks but I would rather be safe than sorry on my budgeting.  adding another 6,000 to those numbers will change the percentages a lot.  Thank you guys so much for the input, I really want to be well educated before I make a purchase like this.  After using the table I think I need to walk away from this unless they are willing to go down quite a bit.

Adam Happel · Answer

no rehab needed, historically there is good occupancy. property management was off of one quote I obtained of 10% plus first month rent on a new lease signing, leases are for 1 year currently. i'd love to get it for 250 but that would be quite a bit lower than what they are wanting.  not sure if i should just offer 250 and wait or just walk away.  property has been on market for 9 months already so i would think there would be some room to come down.  what would be a good figure to use for repairs?

Sam W. · Answer

In my mind you may have underestimated repairs/maintenance as well as vacancy and over-estimated property management, but I'm certainly not informed on the historical experience for the property. Also, you did not mention any capital expenditures right up front, so assuming it is good-to-go and needs no rehab / major repairs.

If you assume all of your cost estimates are correct, you realize about $81/month/door.  Not too bad.  If your goal is $100/month/door, you would want to purchase the property for about $279,000 (which would give you 8.75% CoC ROI).  If 10% ROI is desired, look to purchase this property at $244,000 (again, assuming your cost data is correct).

In the final analysis, the determination of what is a good ROI or per door return is up to you.  If 8% return and $81/door is acceptable, then this is a good investment.

Adam Happel · Answer

thanks for your response, 
i included capital expenses in the 2000 for repairs/main.

J Scott · Answer

Not a horrible investment, but with a $60K cash infusion, your cash-on-cash return is only about 8%.  Not bad for a passive return, but in many parts of the country, you can do better.

Does your repair budget include capital expenses?  If not, I'd factor in another $50-100 per building per month as well.

good investment or not?

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