I am looking into buying a 2 unit, could you please tell me if my cost analysis is correct. Current owner is updating the bath and kitchens, put a new roof, new boiler, water heaters. Separate meters, tenant pays electric, landlord pays heat.
The property has been reduced to 100,000 (zillow estimates 170,000)
Advertising, accounting, legal
or property mgt (10%)…$1,867
Maintenance Reserve
(20%) for future repairs,
replacements, annual unit turnaround…$3,734
Utilities (heat, electric for common area)…$2,400
Taxes …$2,500
Insurance…$1000
water (480), lawn (245)…$725
Net Operating income…$6443
a 5.25% 30 year mortgage would be $450 per month which would yield $87 a month cash flow.
Is this worth all the trouble. Of course if the property appreciates and then yes. Any advice would be so appreciated!
Paying heat is a bad idea in general. It’s especially bad to pay it in an area that gets really cold. I’d also take that Zillow Zestimate with a grain of salt.
Are you going to be able to get financing at the terms you listed or is that what you’re hoping to find? Lastly, don’t bet on price appreciation.
I can almost guarantee that the seller offering the financing will NOT offer a market interest rate like 5.25%, most likely several points higher than that.
Is this on Long Island? If so the numbers are pretty good, in comparison, although your just shy of the 2% rule. You should try to get at least 2% of the total purchase price in rent per month. 50% of the rent will go out in expenses and the remaining 50% is for your mortgage/interest on cash invested/profit. Also your total purchase price should includes everything including closing, rehab, and other related costs.
It would be nice if your heat was separate but I’ve rarely seen that in this area. Although you can do that in any rehab. Note its your rent would be lower in that case as well by a roughly equivalent amount.
I would double check the heat costs. I cannot see an annual expense of $2,400 for heat and common areas electrical expenses. I expect that just your electricity bill would probably be at least in the $50-$100 range per month.
Thank you JakeRodgers and Sammydy!
the property is upstate NY. The common area is just a small enclosed porch with coin operated washer and dryer.
how do you estimate replacement reserve and turnover?
You mentioned a 30 year fixed on the financing. This is just my opinion, but the goal of investing in a piece of real estate
is to eventually own it free and clear. 30 years is too long. Look into a 15 year loan for your investment property financing.
If the property doesn’t cash flow with 15 year money, you shouldn’t buy it.
I've been looking into properties up there. Most seam to have separate utilities, including heat already done. Its practically a requirement when local rents run around $300-$600. One month heating bill can take all of that and more.
Double check the tax rate too, especially if a different "investor" rate. Found some really good stuff that fit the 2% rule but then the taxes ran about 1% a month. :shocked Ouch. Turned out I needed 3% in the good area I was looking at. BTW, upstate you can definitely do better than your numbers. 2% or better is easy to find up there. Also rents are stagnant up there, probably falling now due to the recession, so make sure your numbers work now and do not bet on appreciation or inflation pushing rents higher.
Replacement reserve and turnover is suppose to work into the 2%/50% rules. They are part of your operating costs and very variable so difficult to figure out. The turnover rate is also going to be heavily dependent on the type of apartments you have, the tenant quality you choose, and how high in comparison your rent is. You can look up the local vacancy rate from various sources and that should cover any adjustments to the rent. For replacement costs you can try to get numbers from other area investors (or property managers) holding similar properties for long terms and of course look into the state of the various big ticket items that may need near term replacement (roof, boiler, etc). Usually I'd say reserve 5% of the rent but for upstate rents you may want to budget 10% instead. You can also use a good home insurance policy to help figure out these costs and lessen the effects of any costs shocks.