IS IT WORTH IT?

Question

I am thinking about buying this duplex. Could anyone get me their advice as to whether or not its worth it.
Asking Price- $109,900( fully remolded new windos, carpet, etc)
bottom tenant pays- $550.00 per month including gas and electric
top- Vancant, Have new tenant that wants to rent for $600 per month in April
Comps in the area- $90,000 to $100,000
Taxes-$2,151
Square ft- 2,220
Seller assistance-$3000
* I am a first time home buyer and am pre-approved for 30year 5.125%. I would like to buy this property with 3% down but would have to live there to do so. If I rent both sides out then they want 20% downpayment. Any thoughts about what I should do?

Jon Holdman · Answer

Worth it?

You're paying $110K for a house where comps are $90-100K?  Why?

As a rental, its poor:

Rent: $1150
Expenses: $575
NOI: $575
Down: $22,000
Loan: $88,000
Payment: $527 (30 year, 6% NOO loan)
Cash flow per month: $48
Cash flow per year: $570
Cash on cash return: 2.6%

Bzzzt.  This is a bad deal.

If comps are $100K, you want to pay no more than about $70K.  That would make your down $14K, cash flow per month $240 and cash on cash return 21%.  That's the sort of deal you need to succeed as a landlord.

Account Closed · Answer

I agree with Mike C, Scott and specially Jon. The numbers are terrible. There are a lot of better deals out there - you just need to master the art of finding good deals.

Greg Morris · Answer

Sometimes there is a different set of standards for a owner occ duplex especially for someone who is not looking to be a full time investor but just looking for something, maybe just one property, that will be a solid long term investment over 10 to 20 years.  Someone who wants a mediocre return and no headaches. In this case it sounds like the property fails even in this category.  From what you have said I would not reccomend to any of my clients to purchase this property even as an owner occupant.  With a purchase price near or probably above 100k and rental around $1000 to $1200 it just does not make sense.  The biggest issue I see is the area.  I have no idea where this is, but at $500 to $600 per month in rent, in Erie, this is not an area where you are getting the higest quality tenants and for the passive investor, you are going to have headaches and frustration.  Even if the numbers worked..

Mike C · Answer

Pete,

Yes, I was at the peek. A friend has a condo there. About 35 degrees the day I skied. Bumps were very icy though (I am a bump fanatic) but otherwise pretty good (and not slushy). I skied there and holiday valley a lot in college, among other places.

You need to go to the Champagne brunch in the main lodge some day if you are a brunch fan. Very big. I was up there in the summer last year for the first time to play golf. Lower course is ok. Look forward to playing the upper this summer.

Good investing

Mike C

Pete Krzak · Answer

Mike were you up at the Peek? I did find out that the meters are seperate. My rent is 550.00 and he pays the bills.... Anyway I decided to take your guys advice and pass on it. I am now looking at a duplex for 50,000 and is generating $1,000/month rent. Jon thats again with the number crunching. I used the basic method and am looking forward to purchasing this apt.

Mike C · Answer

Pete, 
          
          One other thing to consider that is very important, especially in Erie. You said the bottom tenant pays 550.00 INCLUDING gas and electric. This leads me to believe the utilities are not separately metered. That means you are not collecting near 550.00 for your rent and makes this an even worse deal. Utilities will be high in Erie, especially in the long, cold winters here IMHO (although snow is down this year). Make sure a rental you buy has the tenant paying the utilities and not you. If I am wrong and they are separately metered, just something to keep in mind in your future deals. It is a pain you donâ€™t want to deal with if you can avoid it. 
          
          I have a friend whose gas bill was 800 month downtown and he closed off essentially the second and third floors. Utilities are high in Erie IMHO. Before you ask, I went to college in Erie so lived there 5 years. In fact, I was up there skiing just two weeks ago.
          
          Best of luck in your investing. Remember, no deal is better than a bad or marginal deal. 
          
          Mike C

Scott Hubbard · Answer

I agree with others and disagree with Matt.  Even if you live in the property, you need to consider your unit as opportunity cost.  Regardless of whether you or someone else lives there, the numbers do not work out well.

Landlording is a job.  Would you go to work for someone without receiving a paycheck? If you buy this property, you will actually be working for free.

Real estate investing is a business!  Forget 1031 exchanges, if you buy a rental property, you should plan to keep it.  Buy and hold investing is just that...  BUY and HOLD.

Matt Mathews · Answer

Personally,I feel you should purchase it, if you are willing to live in the other unit.  As owner/occupant it qualifies for FHA financing.  The rent from the other unit will pay part of your mortgage.  If it needs any repairs you can also get a FHA 203K loan.  As a first time buyer this would be a great way to get started investing.  Also living in duplex as owner/landlord will give you more control over your tenant.  Also, only after a Year that property will qualify for a 1031 exchange or be used as additional income and leverage to purchase another home or investment property.  It's a Win-Win deal as far as I'm concerned.

Pete Krzak · Answer

Thank you again Jon for breaking that down for me. If there is any other advice you wish to give out please let me know. I would love all the help I could get. Thanks again!!!!!

Pete Krzak · Answer

Jon anyway you could share how you crunched those numbers so fast. You truelly know what you are talking about. I would love it if you could give me some advice on mentors or books that could help me out with properties that I was to hold. Thanks for everyones help, I'm just so eager to get my first deal done but I want to get it done the RIGHT way. You guys are truely a blessing!

IS IT WORTH IT?

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