Investment thesis
Buy a well-located older duplex below replacement cost in a stable rental market with strong employment, where rents support a 1% gross rent-to-price ratio and conservative financing still produces positive cash flow.
The numbers
- Purchase price
- $212,000 (2 units, $106,000 per door)
- Capital invested
- $58,400 — $53,000 down payment (25%) plus $5,400 in closing costs
- Revenue
- $2,450/month gross scheduled rent ($29,400/year)
- Expenses
- $11,760/year budgeted: taxes $3,100, insurance $1,450, management 8% $2,350, maintenance $1,760, CapEx reserve $1,700, vacancy 5% $1,400
- Financing
- $159,000 30-year fixed investor loan at 7.125%; principal and interest $1,071/month ($12,852/year)
- Projected return
- NOI $17,640 · 8.3% cap rate · $4,788 annual cash flow · 8.2% cash-on-cash return
- Actual result
- Year one cash flow was $2,930 (5.0% cash-on-cash) after a two-month turnover vacancy and an unbudgeted $3,900 sewer line repair. Year two stabilized at 7.6% cash-on-cash.
Mistakes
- Budgeted 5% vacancy for a two-unit property, where one turnover equals 50% vacancy for that month
- Skipped a sewer scope inspection on a 70-year-old house
- Self-managed for six months and under-priced the renewal on one unit
Lessons learned
- Use at least 8% vacancy on small multifamily and hold a turnover reserve of one month's rent per unit
- Add sewer scope and electrical panel review to every pre-1970 inspection
- Price professional management into the deal even if you plan to self-manage
Final analysis
The deal worked because the purchase price and financing left a margin of safety. The thesis was sound; the first-year shortfall came from optimistic operating assumptions, not the property itself. Conservative reserves would have turned a disappointing year one into a predictable one.
American CashFlow Academy provides general investment education only. Nothing here is personalized investment, tax or legal advice. Investing involves risk, including loss of principal. Figures are drawn from a real transaction and rounded; names and locations are withheld.