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 · Cherry Hill, NJ · Member since 2017 · 59 posts · 14 votes
7y
@Costin I. Thanks Costin, do you have a spread sheet that you use for these calculations or do you use the BiggerPocket tools that are available? Based on all these calculations what cutoffs are you comfortable with?
Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
7y
@Vernell D Watson - I do have a spreadsheet that I developed before I discovered the BP calculators and continuously enhanced for the past 6 years. I have a section for evaluating it as a flip, and another one for evaluating rentals - it allows me to evaluate a rental in three different scenarios - regular purchase, ideal price and BRRR scenario - and also to compare deals apple-to-apple (since you'll be looking at so many houses that you'll get lost in numbers and features and no longer know which one is a good deal, which one is not and only looks good because of some subjective criteria, etc.). I have is color coded based on customizable investing criteria, so it acts like a semafor and I can see right away if it's good deal or not.
In terms of cutoff, in my area of interest, anything cash flowing $100/unit per month with 10% C/C ROI is considered good. Also, anything with cap rate more the 7% should be good, I would not consider something with cap rate less than 5%. But it all depends on how rigorous you are in estimating your expenses (and I suggest to err on the side of being more rigorous, than "flexible") and your investing criteria (maybe you are ok with large down payments, or with getting only 5% C/C ROI, or barely breaking even on cash flow since you are counting on appreciation/speculation).
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
7y
@Vernell D Watson
First, who are these friends telling you it’s not a good return? I’m guessing they don’t own real estate. From what you’ve shared with us, I’d jump all over this. Over a 1.4% rent to purchase price return, tenants pay all utilities, turn key property, self managing. Yes, you need to set aside for maintenance, vacancy, capex. But that should not be an issue here.
If your friends are not real estate investors, I’d kindly remind them the return is cash flow per month, equity on tenants paying 100% of loan, equity on increased value of property, and tax advantages.
This duplex appears like a better deal than my properties, and I’m doing very well on my duplexes. But of course, like everybody said, verify all of these numbers and use the BP calculator.