Will the Community Please Give Me Feedback

Question

Good Evening to most of you, I am looking at picking up a pair of duplexes each for $144,800 and was hoping that the community could give me some feedback on the purchase. I am in the military so I am looking at this from a buy and hold perspective.

Purchase Price: $148,800
Down Payment: $28,960 (20%)
Gross Mortgage: $118,00
Interest %: 4.7% 
Loan Term: 30 Years
Monthly Mortgage (Principal & Interest): $600.79
Rent: Monthly: $1250 Annually: $15,000
Taxes: Annually: $650 Monthly: $54.17
Insurance: Monthly: $72.92 Annually:  $875
Property Management: Monthly: $125 Annually: $1500

1st Year
Cash on cash return $2951 (10.1%)
Equity $2529
Reduction in Taxes $2668
Total Return $8148 (28.1%)
Cap Rate 7.0%

All the units are currently rented out for $625 (this is how I based the numbers above. Although I believe looking at comparisons in the neighborhood get $700 a side). The properties are backed up against the woods on a culdesac. They are all brick units. 2 bedroom 1 bath. dishwashers, fridges, and microwaves. They have washer and dryer hook ups but not the actual appliances. Brand new roof. These properties are within 5 miles of a military base. The rent plus utilities fit within the BAH as well.

I am not sure if there is anything that I am forgetting but if there is please let me know. Thank You and please let me know what you think.

Joel Owens · Answer

Hi Evan,

I agree with the 50% rule as far as costs averaged out over time.

Now this is IF you as the landlord are not covering any utilities. If you are paying water and sewer and trash etc. then you need to be closer to 60% costs.

So let's take a 2,000 month 4 plex. 2,000 X 12 = 24,000
24,000 X .50 (no landlord utilities) = 12,000 Net Operating Income
NOI at a 10 cap is a purchase price of 120,000

If upon inspection you discover immediate repairs needed that were deferred upon you taking over the property you need to deduct those as well. So if 20,000 worth of repairs were found your offer at a 10 cap would be 100,000.

If the landlord did pay utilities then 24,000 X .60 costs = 14,400
24,000 - 14,400 = 9,600 at a 10 cap equals 96,000 sales price

If 20k repairs found then offer would be 76,000

Now do buyers overpay for these properties everyday and sellers hope for a sucker?? OF COURSE!! Do banks care that you make any cash flow when they give you a loan?? NO The banks usually only care that you can pay the note with the proceeds from rents collected and that the DSCR makes sense.

I would study up some more and read up on the 50% costs and make sure when you deploy your hard earned capital that it counts the most. If you invest in a more appreciation driven area then the caps will always be trading at a lower number from demand. Some people only care about appreciation on the back end and tax write off instead of big cash flow going in. It's all about what your goals are.

Ben Bakhshi · Answer

One way to quickly judge an investment that you wish to cash-flow, is by following the 1% rule. Depending the area this can flex to 2%.
1 month rent should equal 1% (0.01) of purchase price. This property stands at 0.008. Unless you have a very good reason to believe property values will rise dramatically, ie. a new military base is being built nearby, the local school got ranked best in the area, then you would probably be better off finding something else.

If you can increase rents to $700 a month, as you said is reasonable, that would help your situation out.

Evan B. · Answer

Gentlemen, thanks for the feedback. I used Mark Spivey's buy and hold calculator. It is a GREAT tool I just may be using it wrong or underestimating the costs of maintenance.

I used a vacancy rate in his calculator of 5% (because of it being a military area, and when I looked at the vacancies on the street and how long they were there it was about a month). Then I used $1000 per side annually for maintenance. Since they are brick I ASSUMED they had less maintenance than something with vinyl siding. When I look at the cost inside the house as far as carpet cleaning, holes in wall, regular cleaning, etc. Once again I did not "think" that I would spend more than that a year per side nor would I have someone moving out every year because again the military PCS's every 2-3 years.

Therefore if these numbers are wrong, which I respect your thoughts and read through the beginners guide, what numbers should I have plugged into the excel worksheet because I still think it is a great tool? Or is the 50% rule better than using an excel document? I thought it was just to get a snapshot of the property? Thanks much, this is great learning.

John Thedford · Answer

OK gentlemen, vacancies, repairs, EVICTIONS? OUCH! So far, so good. No evictions ...:):):) and another :)
Calculating using the 50% ruls is strictly using income minus expenses (exclusive of depreciation)? 
Take gross rents
Subtract mortgage interest
Subtract taxes and insurance
Subtract vacancy and collection loss (is 10% about avg most SFR use?)
Subtract for maintenance (how to arrive at this???)
Subtract for any other expenses (water, sewer, etc).
And according to the 50% rule my expenses should not exceed 50% of the gross income. Correct? 
Note: I just bought Mr Gallinelli's book (along with about 13 others) so YES...I will get this down in time. 
I read part of the other thread, and noted that many say failed investors are due to lack of information, lack of training, lack of being able to accurately calculate NOI, etc (until it is too late).  Right now, I believe I am on safe footing. However, to be better at this, I know I need to read, read, read more, and practice the formulas until I have them down (AND understand their meaning and usefullness).

John Thedford
Naples, Florida

Jeff S. · Answer

Rent after expenses: $625-600.79=24.21x12mo=290.52/28,960=1% cash on cash IMO.

James Vermillion · Answer

Will is correct, you have made a mistake that many new investors make, you have failed to consider all the expenses associated with owning a property.  Here is a good read for you to learn about the 50% rule and how it applies over the long haul:

https://www.biggerpockets.com/forums/52/topics/17612-where-does-the-5-rule-come-from-

Will Barnard · Answer

Your cash on cash is incorrect only because you failed to include all the other operating and capital expenses. Vacancies, repairs, evictions, etc. read the 50% rule. Based on that, your gross of 1250 leaves you $625 monthly, so your cash flow is only $25 for each duplex which is only $12.50 per door. You need 10 times that for it to make sense from a cash flow standpoint.

Will the Community Please Give Me Feedback

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