10,000 closing cost. 10,000 new roof. 25 year old roof. total money down 80,000
6% cash on cash return plus I’m building equity in my house plus gaining tax benefit's from depreciation ect. This is my first property I’m currently in CT where I have stable job and family around. I’m not totally draining my cash reserves incase a correction does happen I’ll have some capital to deploy to off set buying at a higher end market. I know we are in a hot market but what do you guys think I would love some advise. Am I missing anything ? Please and thanks in advance. First property btw
Realtor · Plain City, OH · Member since 2022 · 82 posts · 58 votes
4y
@Seth Alexanderowicz First off, this does not meet the 1% rule. The purchase+roof = $305k, so by the 1% rule, you need $3050 in monthly rent to safely meet expenses. Larger properties begin to deviate from this rule, or you may choose to buy something that doesn't meet 1% if the market is appreciating. As a new investor, cashflow may be more important than appreciation.
Expenses: $35 for water seems incredibly cheap, but I'll use it. Let's use conservative numbers to re-estimate the repairs and vacancy. And you need to include savings for capital expenses other than the roof. The conservative standard for these three are 10% EACH of the monthly rent, or 2800x.30= $840. Add this to the 1400 mortgage, 450 tax, 200 insurance, 35 water, and you get a total expenses of $2925 per month.
Are you willing to take a monthly loss on this property? This seems like a no-deal.
So utilities are tenant-paid I'm assuming? Are you managing yourself? Were you able to get the rent rolls and/or income statement from the listing agent or previous owner?
Without knowing where the property is, I would add in landscaping/snow removal and a capital expenditure set-aside (5-10% of monthly rent), particularly if the property is older and PM of 10% unless you're managing yourself. This means that you're 6% cash on cash will just about disappear.
Also, has the property been on the market very long? If so, maybe you have a little bargaining power to see if they'll pay a portion of your closing costs or that roof repair at closing? If it is brand new on the market and will go fast (I'm assuming this option from your over-ask offer), you may have little bargaining power.
Like you said, you'll be gaining equity from the principal pay-down and reaping the tax advantages, but I think you could deploy $80K in a different market for a far better return. Have you looked at STRs anywhere?
Meriden, CT · Member since 2018 · 698 posts · 500 votes
4y
@Seth Alexanderowicz - As a CT investor myself, what you will learn is that duplexes are sometimes worse investments than single family homes. You are still responsible for water (your number is low), landscaping, snow removal, and trash that you would not be responsible for if you owned a single family. I'd be happy to speak specifically about the deal if you are interested.