The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: frugally on October 02, 2015, 12:03:24 PM
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Hi Folks -
I have two properties I'm interested in purchasing - I'm hoping I can get some feedback on them.
Expenses are defined as: 13% maintenance/repairs, one month vacancy, PITI @ 4.75% w/ 25% down, 10% management fee that I pay to myself
Property A - Vacant Duplex
Notes: On the market for awhile. In a C-class neighborhood (not dangerous, just not great houses) and on a corner lot (higher tax assessments when they happen) with 2500 square feet. I own a property two doors down.
Price: $100k - listed @ $109k. Probably $3500 in repairs but it's a total guess at this point.
Gross Rents: Probably $1350 based on my conservative estimate to get the types of tenants I want.
Expenses: $1084/mo
CCR 10%, cap rate 7.8%
Concerns: The neighborhood isn't great, the return could be better, but the convenience of being near my existing property makes me intrigued.
Bottom line: With winter coming (I live in a snowy area) and it being completely vacant in a bad neighborhood, I feel like I'd need to get a better deal. Agreed?
Property B - Half-vacant duplex
Notes: About 5 minutes from my other rental. In a nicer neighborhood near the city hospital (lots of medical staff rent). Smaller lot, 1500 square feet. The upper unit has a longer term tenant who does snow removal/lawn care and pays $675/mo. This is about $50-75 lower a month for the area. Does not need ANYTHING done...newer major items (siding/roof/furnaces/etc.)
Price: $135k - assuming I could get it for 120k and split closing.
Gross Rents: $1350
Expenses: $1122
CCR 8.5%, Cap rate 6.9%
Bottom line: This is a really nicely maintained property, but definitely a worse deal. It seems like the hassle is probably not worth it.
I'm not wowed by either of these but I'd be interested in getting some general feedback from others on numbers I might be over or underestimating, and if others agree that these properties aren't worth it unless I can get better deals.
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I'm very tired and possibly confused, but isn't CCR (Cash on Cash Return) effectively equivalent to the "market return" of a stock purchase?
Because if it is, wouldn't you do better just buying some stock?
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It's how much cash flow you make each year divided by the total amount invested. It's a slightly skewed number because you don't count principal pay-down in that equation, but basically your conclusion is where I'm at. I'm trying to see if there's really any reason to look at these as financially better than buying stocks...
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I wouldn't buy either of them, if it's vacant a couple months out of the year or needs something major replaced then you'll lose money.
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I would personally go with B, and it doesn't sound like a bad deal. You could also go in and do a few more upgrades and raise the rent. The thing about an 8% return from real estate is that is a true 8% - it will rise with inflation as rents usually do.
There's also the peace of mind from real estate with the checks flowing in and not having to worry about price fluctuations in the market. Plus, you have so much more room to create value and make your own success. Housing prices tank? Who cares, you're still collecting rent.