duplex what do you think?

Question

What do you all think of this deal. What would be your questions or concerns? Thanks for any input.

I have found a duplex. Its 2 bed 1 bath each side. 1,400 sf total. It rents for $425 a side and both sides are currently rented. For the area the rent is to cheap. I feel like it should get 450-475 easy enough. Asking price is $60,000.

Rent $850
Tax/ins $125
Pmt-$459.00(thats financing 60@ 4.5%fixed for 5 years on a 15 yr note)
Profit $266

Here are the variables-I think i could get it for 52-55K. I could also put 10-20% down if i need to. Which would bring the payments down and I really feel that as a side came open I could rent for $475.00

Thanks in advance for your opinions!

Harry M. · Answer

Hey Andy,
I think it's a decent, though not great, deal w/ financing over 30 years. Over 15, not so much.

Here's how I'm arriving at my numbers using the aforementioned 50% rule which estimates all expenses outside of principle and interest as 50%. This includes vacancy, taxes, insurance, maintenance, management, and your capital expenses fund that you should build up for your once every 5-10 year things. Management is a good thing to include even if you are doing it yourself - the additional money you earn by managing yourself is more like money you earn by doing a job than income on your investment.

15 year scenario:

Asking: $60000
Down:  $15000
Financed: $45000 @4.5% over 15 yrs

Gross Income: $10200 (850/mo)
Expenses (50% rule): $5100
NOI: $5100

Debt Service (PI part of PITI): $4128
Cash Flow:  $972 (81/mo)
Cash-on-cash return: 6.48%

30 year scenario:

Asking: $60000
Down:  $15000
Financed: $45000 @4.8% over 30 yrs

Gross Income: $10200 (850/mo)
Expenses (50% rule): $5100
NOI: $5100

Debt Service (PI part of PITI): $2832
Cash Flow:  $2268 (189/mo)
Cash-on-cash return: 15.12%

When you add the principle paydown back into equation, the numbers even back up, however the extra money you pay in order to be done in 15 years is still only saving you 4.5% interest - something that money could beat if put towards a second property. 
Now, if you can get the rent up to 950, I think it becomes a really nice deal in the 30 yr scenario.

Raymond B. · Answer

Andy N.,
Here is a link to the 50%/2% rule to use as a guide:

http://www.biggerpockets.com/forums/52/topics/18371-help-me-understand-this-deal-and-5-2-rule

Raymond

Steve P. · Answer

$850-125-200 maintenance, etc. = $525 cash flow not considering lender. $525 times 120 mos.(10 yrs.) = $63,000.

If a property will pay all my initial outlay back in 10 yrs. I like it enough to do more due diligence. My expectation is this is a winner!

Ty Golera · Answer

I am glad I ran across this as I was looking at a condo for $120 with HOA and profit of only 350-ish.
Also, will you live close to the property?  
You should also look at your tenants lease and credit. Being a landlord is not always so easy. I prefer a prop mgr instead (It's a write-off too) than to be there showing a vacant unit, fixing a grbg disposal, etc.

Andy N. · Answer

Steve Im new the 50% rule. Can you help me out here is what im looking ill show the most realistic options.

Option 1 purchase for 55,000 put 20%(11,000) down for 15 year @ 4.5% Rent each side $425

Rent $850
Tax/ins 125
Pmt 336.60
Profit-388.40

Here is where id like to see it as new tennants come. I could make the rent $475 so it would look like this.

Rent-950
tax/ins-125
Pmt-336.60
Profit-$488.40

Thoughts? Thanks! Andy

Steve K · Answer

The numbers work although using the 50% rule you'll end up closer to 190 a month assuming you could pick it up at $52k.  I'd expect you'll have to put 25% down.

Andy N. · Answer

I will be managing my self. 1 unit is been updated in the last 2 years. The other could stand it but I dont think its necessary at this point. I feel like I could go 2 years and not have to spend much at all. That will also let me build up a little of the cash flow.

Mike Jakobczak · Answer

Remember to factor in, vacancy rate and also allowance for repairs.  This will bring down your profit a bit.  I'm assuming you will be managing this property yourself?  I always factor in management cost, regardless if I am managing it. This will help if you ever sell that your property can profit even with management fees.  Shows that you know your investment is good self-sustaining property for investors.

Also are the units both up to date?  Or will they need upgrading once the tenants move out?