Analyzing a Duplex - First Attempt

16 Replies

I am just starting to look at my first properties with my girlfriend and we stumbled upon a listing down the street for a duplex being sold as an approved short sale. We are determined to buy a small multi-family property and house-hack to get into real estate as with many others on this site. Here's the deal:


Listing Price: $160,000

Estimated Rents: $2300/mo

50% Rule: $1150/mo

Mortgage P&I: $840/mo

Monthly Cashflow: $310/mo

Annual Cashflow: $3720/year

Down Payment: $5600 (3.5% FHA Owner-Occupied)

Annual ROI: 66.43%

Since this property has been on the MLS for a long time, I figure there must be something going on to keep it unsold for so long (350 days). I will be viewing the property tomorrow to confirm any needed repairs, but it seems like even with a few thousand dollars of needed updates, this should be an excellent deal for a house-hack because we would be able to move in and make repairs/updates on an ongoing basis as cash allows.

So, anything I'm missing here? Please feel free to brutally poke holes in the deal. Thanks in advance!

Just remember the 50% rule is a rule of thumb! Once you view the property make sure to break down all the expenses one by one. Use the BP rental property calculator... it makes it very easy.

Originally posted by @Kyle Soderman :

Just remember the 50% rule is a rule of thumb! Once you view the property make sure to break down all the expenses one by one. Use the BP rental property calculator... it makes it very easy.

Kyle, I'll be sure to do that, thanks for the tip. Just wanted to run it by someone more knowledgeable than myself. To be clear, the property tax and insurance are considered part of the 50% Rule estimate? I would only be checking to see if the Mortgage P&I can be covered after deducting the estimate of fixed expenses, right? Thanks again!

Originally posted by @Percy N. :

Samuel Biondolillo forget the 50% "rule" and plug in real numbers.
Don't forget to account for vacancy, shared utilities and any cap ex.

Percy, thank you for your input, I will be sure not to be a slave to this metric. My chief concern at this point is maximizing my time, along with the time of my team members. If I'm scanning the MLS for my area, I want to be able to identify properties which are worth more investigation (i.e. actual numbers, as you mentioned).

Do you think the quick-and-dirty, back-of-the-envelope calculations I am doing here look like they are correct? Am I missing something in my math for preliminary screening? Thanks again for your willingness to help a newbie like myself.

Good work so far! If you have more information it would be easier to say how good of a deal this is. What year was the duplex built? Also, you will want an inspection on the HVAC, WH and roof as big ticket items. And you want to know what the taxes are... I am buying a duplex for about the same amount and the taxes are around $4,500/year!

I'd guess there is something that needs a major repair since it has been on the market so long, or your market is very slow.

Originally posted by @Andrew Meyer :

Good work so far! If you have more information it would be easier to say how good of a deal this is. What year was the duplex built? Also, you will want an inspection on the HVAC, WH and roof as big ticket items. And you want to know what the taxes are... I am buying a duplex for about the same amount and the taxes are around $4,500/year!

I'd guess there is something that needs a major repair since it has been on the market so long, or your market is very slow.

 Just at first glance, I am with Andrew. It does not look like a big number/metric problem for the deal to pencil out on an envelope. The caution sign might be the condition. Consider there are probably many knowledgeable investors and real estate professionals that likely passed on this property. Why? It may or may not be something you can work around. So get the best inspector and bring a really knowledgeable contractor for a look, too. Do lots of detective work and research homework on condition.

As others mentioned, the fact that it's been on the market for nearly a year, at what appears on the surface to be a decent buy, seems to point in the direction of deferred maintenace and a big CapEx bill coming down the line. We just looked at a package of 3 duplexes and a condo that seemed to be a decent cash flow. But, once we accounted for 6 old furnaces and A/C units, 3 roofs at about 35% life remaining (at best), one duplex needing treatment for termites (they were active with a tunnel on the foundation), we decided the return was not worth the risk. Try to determine the numbers you will have for a new roof, HVAC units, and how far down the line might those come up, as those can eat up the $3,720 cash flow you project very quickly. Good luck!

Originally posted by @George Kaberlein :

As others mentioned, the fact that it's been on the market for nearly a year, at what appears on the surface to be a decent buy, seems to point in the direction of deferred maintenace and a big CapEx bill coming down the line. We just looked at a package of 3 duplexes and a condo that seemed to be a decent cash flow. But, once we accounted for 6 old furnaces and A/C units, 3 roofs at about 35% life remaining (at best), one duplex needing treatment for termites (they were active with a tunnel on the foundation), we decided the return was not worth the risk. Try to determine the numbers you will have for a new roof, HVAC units, and how far down the line might those come up, as those can eat up the $3,720 cash flow you project very quickly. Good luck!

I agree, but on the flip side, if you KNOW and can account for it, as long as you can work the numbers, you likely won't have as much maintenance issues for the future knowing you have new units/roofs/etc. A new furnace/roof can last 20+ years, so should realistically be a majority of the effective time you will personally own and be working with the property. Having to maintain an old unit or fix multiple leaks can be as bad or worse then paying up front to get new units.

Originally posted by @Andrew Meyer :
I agree, but on the flip side, if you KNOW and can account for it, as long as you can work the numbers, you likely won't have as much maintenance issues for the future knowing you have new units/roofs/etc. A new furnace/roof can last 20+ years, so should realistically be a majority of the effective time you will personally own and be working with the property. Having to maintain an old unit or fix multiple leaks can be as bad or worse then paying up front to get new units.

 Absolutely.  If this is the first analysis, I'd hate to see him get caught with a $5K bill 4 months into the ownership with no reserves to cover it.  That could really take the wind out of his sails!  

Exactly. I am under contract on a duplex that is about 21 years old and I think has original roof and HVAC, so I am either going to see if seller is going to work on them or plan on getting them replaced soon. Luckly my W2 job can easily cover the needs and I have enough in savings if everything needed fixing at once so its not an issue for me, but for some it could be very difficult. That is one reason why age matters a lot. If this duplex is like 1930 build and hasn't had any work on it in 30 years... yeah I could see why everyone walked away so far.

Not sure if this is relevant, but this home was de-listed over the summer and has only come back on to the market earlier this month. Relevant price history:

Listed 11/06/14 $249,900

Price Changed 03/23/15 $219,900

Price Changed 06/23/15 $199,900

De-Listed 06/23/15

Re-Listed 10/05/15 $160,000

$249k is comparable to properties in the neighborhood which are in good shape, so I have no idea what could be going on, but I will find out in about 9 hours :)

Originally posted by @Samuel Biondolillo :

Not sure if this is relevant, but this home was de-listed over the summer and has only come back on to the market earlier this month. Relevant price history:

....

It means it was either under contract and fell through or the listing expired and was relisted.

Assuming you got a see the property by now, how was it?

The 50% rule is fine for scanning MLS and identifying your shortlist. Just don't place a bid (at least not without contingencies based on that rule).

Originally posted by @Percy N. :
Originally posted by @Samuel Biondolillo:

Not sure if this is relevant, but this home was de-listed over the summer and has only come back on to the market earlier this month. Relevant price history:

....

It means it was either under contract and fell through or the listing expired and was relisted.

Assuming you got a see the property by now, how was it?

The 50% rule is fine for scanning MLS and identifying your shortlist. Just don't place a bid (at least not without contingencies based on that rule).

 Showing is in about an hour. I'll post details this afternoon.

I went and viewed the property today with my girlfriend and our Realtor (a personal friend). It would definitely be a big project to take on for our first deal. Part of the roof would need to be replaced at a cost of $8-10k and the interior could use some serious rehab on flooring/wall coverings in addition to general updating. There is a water leaking issue on one exterior wall that would need to be investigated further to get an accurate picture of the necessary renovations. 

We will need to get in touch with a contractor we know to get some estimates on a realistic rehab cost, but our Realtor suggested we would need to get an FHA 203(k) loan for around $185k to pay for contracting everything out. The numbers still look pretty decent after making the necessary adjustments, and it appears we would be able to capture a good amount of equity if things work out smoothly (when does this happen?). We have reached out to a mortgage broker to see what kind of financing we can secure.

In the meantime, my girlfriend and I have a lot to think about. Doing a major rehab while moving our primary residence in conjunction with buying our first property and learning the ropes of property management is fairly intimidating; it is likely we will wait for a property in better condition which is more move-in ready. We haven't ruled the property out, but we are not exactly excited to take on these challenges during winter in New England.

@Samuel Biondolillo where is this multi? I would love to get my hands on a project like that. A duplex renting in Concord for $2,300/month is extremely high. Does it already have tenants in it?

The $160K for it is not a bad price, but it sounds like a better option would be a hard money loan to rehab the place and then refinance to a traditional mortgage once everything is fixed and get yourself some tenants before you do. If you need a great contractor let me know! 

Originally posted by @Seth Tucker :

@Samuel Biondolillo where is this multi? I would love to get my hands on a project like that. A duplex renting in Concord for $2,300/month is extremely high. Does it already have tenants in it?

The $160K for it is not a bad price, but it sounds like a better option would be a hard money loan to rehab the place and then refinance to a traditional mortgage once everything is fixed and get yourself some tenants before you do. If you need a great contractor let me know! 

Seth, I sent you a PM with the location. My gf and I have chosen to pass on the property for now. With minimal experience in the area, both of us working full-time, and my gf still in graduate school, we are going to look for something in need of less work to start out. Thanks to everyone who chimed in, this was a good learning experience for us.