Rental Property Investor · Cherry Hill, NJ · Member since 2017 · 59 posts · 14 votes
Hello Everyone,
I have a quick question. Does it makes sense to buy a multi family home for 180K that will cash flow $1100 a month after the mortgage, taxes and insurance is paid? It's a two unit property and each unit pays $1275. Some of my friends say that I would be acquiring to much depth (180K) for such a small return. I disagree, 1275 x 2 = $2550 x 12 = $30,600 / 180k = a 17% cap rate roughly. These numbers make sense to me......comments?
Attorney · Akron, OH · Member since 2016 · 535 posts · 389 votes
7y
You're not accounting for the NOI (net operating income). NOI includes maintenance, taxes, repairs, management costs, janitorial, etc. Or, you could use an adjusted cap rate and include vacancy, capital expenditures, and PIMI.
(Gross income-NOI)/purchase price = cap rate
(Gross income-adjusted NOI that includes PIMI, capex, and vacancy)/purchase price = adjusted cap rate
Rental Property Investor · Scottsdale, AZ · Member since 2016 · 46 posts · 11 votes
7y
180k property that is bringing $2550 a month income, I say this is a good deal on paper. How is the area? is it a good rental neighborhood? crime rate? Also, are the units rented and you would be buying the property like that, if yes, i would make sure to verify that the tenants were properly screened and they are paying on time etc...
Attorney · Akron, OH · Member since 2016 · 535 posts · 389 votes
7y
You're not accounting for the NOI (net operating income). NOI includes maintenance, taxes, repairs, management costs, janitorial, etc. Or, you could use an adjusted cap rate and include vacancy, capital expenditures, and PIMI.
(Gross income-NOI)/purchase price = cap rate
(Gross income-adjusted NOI that includes PIMI, capex, and vacancy)/purchase price = adjusted cap rate
Rental Property Investor · Cherry Hill, NJ · Member since 2017 · 59 posts · 14 votes
7y
@James Galla
This place is turn key. When I subtract the mortgage, taxes and homeowner's insurance, Im left with 1100 to 1200 a month. I would be managing it myself. Its in a great neighborhood and tenants are already in place. There's no PMI because I would be putting 20 percent down on the purchase price. Im not sure of the vacancy rate.
Rental Property Investor · Cherry Hill, NJ · Member since 2017 · 59 posts · 14 votes
7y
@Eric Oszczypala the area is great along with the tenants. After taxes, P & I, and HOI, I'm actually netting 1100 to 1200 a month. Not sure of vacancy rate and maint but I will manage it myself.
It is decent if you are willing for a very long-term hold on the property and as mentioned above, you do need to account for repairs and more that could be possible especially if the area is prone to harsh weather. You always need to remember that costs change dramatically at times and if something comes up to mess with the status quo, recouping costs will take a while if you are paying out of pocket. Other than that though, its decent for long term hold.
Rental Property Investor · Cherry Hill, NJ · Member since 2017 · 59 posts · 14 votes
7y
@Mary M. Tenants pay for their own utilities, I included taxes and fees along with insurance. These were just rough numbers. I will find out vacancy rate and repairs shortly. I just wanted to know if initially this sounds like a good investment for long term cash flow.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
7y
@Vernell D Watson i am coming up with about 7.5% cap rate. I am just estimating numbers but even so if this is a good area and it will appreciate and you are holding long term i would consider it a good investment. Its about what my investment throws off.
NYC, NY · Member since 2016 · 617 posts · 456 votes
7y
If you haven't done so, you should use the BP rental property calculator.
Not knowing more specifics for this property, I make the following assumptions:
NJ is a high RE tax state. Cherry Hills tax rate is 3.1%. If the purchase price is the same as assessed value. RE taxes of $5800.
20% down, 30 yr mtge at 4.75% with 2 points.
Closing costs of $5k wrapped.
Insurance of $125/mo.
Then, yes. Your net would be $1100-1200.
However, if you set aside funds for vacanies 5%, maintenance 8% and capex 8%, as you should, your net drops to$600-650. $400-450 if you also budget 8% for Property Manager.
Using these assumptions, it seems like a good deal though I would:
Be sure to verify taxes and insurance,
Not assume it's turnkey,
Verify that current and prospective rents are the same, and
Not assume anything about the tenants without confirmation.
Rental Property Investor · Cherry Hill, NJ · Member since 2017 · 59 posts · 14 votes
7y
@Karen O. Wow Karen, that was very savvy. I must be getting the hang of this Real Estate thing because I understood everything you said :-) The property is located in Albany, NY where the taxes aren't as high as Cherry Hill but thanks...
Ah. You mentioned self manage so I assumed Cherry Hill.
Albany, NY is also highly taxed but not quite as much. Still, unless you know the area really well or have connections there, I'd still suggest you budget for PM, at least in the beginning, just in case. You can always discontinue or keep the funds in reserve to give yourself a bonus at year end if it turns out you don't need it.
Rental Property Investor · Scottsdale, AZ · Member since 2016 · 46 posts · 11 votes
7y
Albany, NY weather is harsh during the winter, make sure the house is ready for this type of weather..freezing pipes, heater not working properly etc.. is this close to the University there? are you going to rent to students?
@Vernell D Watson I think the investment sounds awesome!! I would save 10 percent for repairs, find out what your areas history for Vacancy rate Is and adjst your cap rate. What would be your exit strategy ?
Rental Property Investor · Cherry Hill, NJ · Member since 2017 · 59 posts · 14 votes
7y
@John Cumpton I'm retiring in 4 years. This property would be used to offset my retirement. Normally I would sell it in 5 to 7 years due to depreciation but I would probably hold onto this one for residual income.
Rental Property Investor · Baton Rouge · Member since 2018 · 20 posts · 19 votes
7y
@Vernell D Watson
With all that said, I’ll buy it if you don’t! Numbers don’t lie. 😜
Legit public schools, improving or already solid neighborhood, and a strong local jobs economy. These are my top three must haves. Preferably not one industry but multiple strong job opportunity markets.
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
7y
@Vernell D Watson That investment sounds excellent, and you have gotten some great feed back on your thread; make sure your homework is all done thoroughly. Turnkey or not, I recommend making an offer subject to inspection of financials and property. Use a licensed inspector and you might have your CPA review the financials. Look the leases over and make sure the rents listed in the rent roll match the incoming in bank account journal entries. Screen the tenants as though they were new. If you are buying from a 'Turnkey Provider' do everything twice! It can be a big bad world out there. All the best.
Real Estate Broker · Detroit, MI · Member since 2014 · 384 posts · 149 votes
7y
@Vernell D Watson I would have to know the yearly tax amount, HOA if any, and insurance amount. For quick evaluations, when I don't have actual expense numbers, I take 70% of the gross income as my Net Operating Income. Based off your scenario, this property will still have a 12% Cap Rate which is healthy. Of course there are other factors to consider but the numbers do work for this deal!
@Vernell D Watson wow that’s great! DUPLEX IN MY VALLEY SELLS FAST! Maybe a 1031 tax deferral exchange would be good to look into down the road before retirement as well. Good times.
Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
7y
@Vernell D Watson If you manage to cash flow (!) at $1,100 per MONTH, after all expenses calculated, for a property that costs only 180K...that is GREAT. If you get cap rates above 8% or Cash on Cash Return on Investment over 10%...that is GREAT.
Just make sure you don't confuse Net Operating Income (which is Gross Rent minus Operating Expenses) with Net Annual Income (which is the annual cash flow and is the NOI minus mortgage expenses and vacancy). And make sure to account for the following expenses:
1) Mortgage
2) Mortgage insurance (PMI or MIP) or FHA Risk base
3) Property Taxes
4) City Taxes
5) HOA (Home Owner's Association) Dues and Fees and Assessments
6) Insurance
a) Property Hazard Insurance
b) Flood Insurance
c) Earthquake Insurance
d) Umbrella Insurance
7) Vacancy Rate (usually 8% - the equivalent to one month a year, or 5-6% if multifamily and/or if experienced, if not use 8%)
8) Utilities (you’ll have these if your tenant is not covering them and/or during vacancy)
a) Water § Sewer § Garbage
b) Electricity
c) Natural Gas
d) Propane
9) General Maintenance (usually 5%)
a) Upkeep § Landscaping
b) Snow removal
c) Repairs
d) New Appliances
10) Capital Expenditures (usually 5%, higher is the property is old and obsolete, less if fully rehabbed and all mechanicals and roof are new)
11) Property Management (8%, even if you self manage, your time still has value and there might be a time when you'll want to be completely hands off or you'll not be able to do it, vacation, retirement, etc.)