Check my CashFlow calc! Good investment??

[thug]

I've been reading up and looking at duplexes to buy for a while now.  And finally one that interests me has hit the market and I have no confidence in my cashflow calculation, mostly because it seems like a good deal but the numbers aren't working out as well as I thought.  Please take a look.

Duplex
2004 FMV 198,400
Will be getting comps soon but it should appraise over $200,000
Listed at $199,900

I know the seller just wants to get rid of the thing so I'm hoping (and will find out soon) to get it for $180,000

One side is rented for $735 (pretty fair for the area, maybe slightly on the low side) the other I would owner occupy, so here's the my cashflow calc:

Rent $735 x 2 sides x 12 months = +17640
Property Tax = -4050
Vacancy (-18 days/yr) = -900
Insurance = -1600 (roughly, depending on deductable)
Maintenence ($50 per side per month) = -1200
Tenant pays utilities.

So this leaves $9890 or $824 a month for mortgage.  Should be able to put around $20,000 toward the purchase to avoid PMI, but dang...finding a ~$160,000 loan @ $824/mnth isn't too easy.  Is this calculation correct/realistic?  It's kind of disheartening because this is a pretty good deal compared to what I've seen the last 4 months.

[aak5454]

you allowance for vacancy might be a bit low, but depends on tenant profile and if the current tenant is well settled.

as for the loan; seriously consider doing an interest only with a 5 or 7 yr. fixed time period.  Tat would make your payment about $800/mn

then the big question is the upside in teh rent; is there one.  can you do some minor "clean and shine" and get the rent up to $800 per side?  I have found if I can buy a place that under-rented and perhaps a bit rough around the edges with some fixin' up over a few years and being bit agressive about raising the rent, the number look great after a few yr.

An example, I bought a duplux in '01 for $100k (in outskirts of LA area); it was rough and underented.I put $10k down and have about another $4k in reapir (mainly to the back unit which was completely hammered), but now it a reasonably OK place and it generating $450/mn in cash.  Yes, it took some work and a few yrs, but $5.5k per yr return on $15k invested.....I'll take that all day long

So, I would keep looking at this deal; it has possibilities

[kdhastedt]

I don't think that his vacancy calculation is all that low, necessarily.  Remember he plans on occupying one side (or says he is), so there will only be a vacancy on one side.  I also believe that the insurance may be on the high side.  Renters insurace is cheaper than homeowners because you're not insuring content just structure.  My private residence ($280K) insurance is just under $1000.

I think that all the calculations need to be re-looked.  Do the calculations as if you have two renters and then do the calculations as if you have one then subtract it from the total and see if you can actually afford to live in the other side.

To get a loan for $160K that has an $824 payment you have to find someone to lend to you at 4-5/8%...not very realistic IMO.

Keith

[thug]

To get a loan for $160K that has an $824 payment you have to find someone to lend to you at 4-5/8%...not very realistic IMO.

Yeah, I doubt I'd find that too.  And no way am I getting an interest only loan.  If I have to do that to make this work, then I wouldn't do it.  I've come to the realization that positive cashflow probably just doesn't happen to often in my area.  Looking at some comps the majority of duplexes have sold close to their appraised values.  Looking at the loan amounts and where rent is in this area I don't see how these owners have positive cashflow.  

This particular duplex could use some low cost fix up that could boost the potential rent (which is already slightly on the low side).  So although it may not be a positive cashflow situation to start, I do plan to live there for at least 2 years so I have time to do some maintenence.  And my long-term plan for the property is to own it for 10+ years.

So OK, here's my new FIRST year calculation:
Rent $735 x 2 sides x 12 months = +17640
Property Tax = -4300 (increased because it will be higher when the property is appraised)
Vacancy (-18 days/yr) = -900 (if I'm living there this is really 36 days)
Insurance = -1600 (I'll keep this the same although it has potential to drop to ~$1200)
Maintenence ($100 per side per month) = -2400 (raised because I'm sure there will be more fixing the first year)
Tenant pays utilities.

Leaves $8440 or $700/mnth.  I'm sure I can find a 5 3/8 rate which would be about $900/mnth.  So I'd have about a $200 negative cashflow to begin.  Currently my wife and I pay about $1000/mnth on our current mortgage so we'd have no trouble absorbing this the first year.

If I put money into it and fix it up, do you think this is a reasonable cashflow calculation for 2 years down the road:
Rent $800 x 2 sides x 12 months = +19200
Property Tax = -4600 (est.)
Vacancy (-18 days/yr) = -900
Insurance = -1600
Maintenence ($50 per side per month) = -1200
Tenant pays utilities.

Pretty much even-steven.  #1 - Would any of you consider doing like an interest only or ARM loan and then refinancing in 3 or 5 years just to have the lower rate for the rough first years?  #2 (more of a question for myself) Is $800/mnth reasonable in 2 years?  #3 - Is even and negative initial cashflows alright in long-term investments?  What do you guys think?

#4 - One more thing...am I correct in my claim that lenders go off of the appraised value and not the sales price to determine if PMI is neccessary?

[kdhastedt]

Thug,

I looked at your numbers...

(1) Are you sure the taxes are $4300 a year on a $180K property?  Where are you, like Taxachusestts?  I was paying $2500 a year on a $300K+ property in Virginia.  

(2)  I think your insurance should run between $800 - 900.  I'm not an agent but I think your estimate is high.

(5) Your vacancy rate of 18 days a year is a 5% vacancy rate...is this acurate for your area?  If so it only applies to one unit because, if you're living in the other unit, there is no vacancy!

Using your numbers and a 30 year, $180K mortgage at 6.5% I get a total of expenses at about $1707.  

Here is the question:  If you  bump the rental up to $800, is the ownership of the buiding worth $900 a month to you?

And, yes, the MIP will be based on the appraised value not on the purchase price.

If I were in the same situation, I might consider an ARM if I were going to do some fix-ups and get a higher rental rate.  A little paint/carpet can go a long way towards raising appraisals AND rent rates!  Then, when the rents are up, you can refi.  The drawback is that you probably won't get a lower rate in the future!

If you're going to live in it, have you looked into HUD (FHA) financing?

Keith

[thug]

1) Virginia taxes look sweet.  I live in Wisconsin.  The taxes on my house was $2350 last year and it's a $125k home.  This duplex had $4k taxes last year with a $199k FMV.  So sadly, the tax info is correct.

2) I talked to my insurance agent yesterday and I should be able to get rates between $1000-1200, so my estimation is a little high.  This is just from a 5 minute conversation...I'm sure if I sit down with him I could probably get more info and lower rates.

What other benefits to FHA financing have besides low money down-good rate?  Since it's government financing there isn't PMI, but there is something similar right?  Just a different name?

[kdhastedt]

Yes, but it is lower than MIP, I think...there are also normally fewer closing costs with a HUD/FHA loan because the government limits what the lender can charge.

[thug]

Thanks, I will definitely look into that.

[aak5454]

determination of PMI may be set by state law.  As an example in Calif, it is based upon the purchase price.  Ask your lender.

FHA loans have some extra fees so it may or may not be cheaper.  Its been over 10 yrs since I did mine so I don't rememebr the fine details, but I seem to recall that FHA does not prevent PMI (?)

If you can do 20% down then do it to avoid PMI; it a pain to get rid of and money down the toilet; or talk with your lender about doing a 80% first and a 10% 2nd.

[gordo2417]

Where are you in WI?  I'm in Appleton.

Nate

PS.  Yes WI taxes do suck.  Just ridiculous.

[ginasands]

I am an ardent believer in the pick-a-payment loan where your start rate is 1.95% and increases 0.75% per year until it gets to the 5.91%.  You can then refinance the loan and go back to the 1.95%

These loans offer investors the ultimate in flexibility and you have the option of paying the 15yr. 30yr. minimal payment or interest only payment every month.  Get a portfolio Lender preferably World Savings and get instant cash flow.

Caveat Emptor.  Save part of the money that you are saving @ the 1.95% and put it in an interest bearing vehicle at the end of 5 years when you are ready to refinance.... you're in Good Shape financially.

[luaprenraw]

just a couple of points. how strong is the income property market in wisconsin if you can get the seller to sell you an approx. $200,000 listed property with FMV of about the same amount for $180,000? maybe it's not as strong as you think?? or maybe it's not really worth what you think it is.

the vacancy factor you are using also appears to be a little light. keep in mind you're not only including actual vacant days but also collection loss (not all tenants pay their rent).

repair figure may be a little light as well. if you have to go in and rehab a unit for a new tenant what is that cost?? also, i didn't see any amount for replacement reserves--roofs, appliances, flooring, etc. all wear out and have to be replaced periodically.

is there any outside electrical? do you as the owner pay for water, trash, sewer??? if so you have a utility expense.

you will also be able to depreciate the half of improvements that you don't live in (not the land though).  so that will probably help on your taxes.

may be a good deal for you. but then again, you may wish to re-evaluate.

[habit]

Thug,
I'm not sure what part of Wisconsin you're in, I'm near Madison. Madison Gas & Electric publishes vacancy rates for their service area at http://www.mge.com/business/EcoDev/rental.htm
you might want to see if you can find something similar in your area. BTW, I paid $3600 in taxes on a $160k home 1/2 duplex last year... Wisconsin taxes are horrendous!