Could this Duplex be as profitable as I think it is?

Question

Hey Everyone,

I am looking to get into real estate investing and I'm trying to learn as much as possible when it comes to assessing a property. Id like some feedback on a deal I found.

I found a duplex near my house that the owner is asking $350,000 for. It has 3 beds 1 bath on each side 2200sqft total. One side has a tenant already in it paying $1,400 (what the tenant himself told me he pays). This side is in pretty good shape and wont need any work done while this tenant is renting. The other side needs help. Everything in the kitchen needs to be replaced, the bathroom needs a remodel, all of the carpets need to be replace, some paint and a few touch ups should be everything it needs. I don't currently know how old the roof is but the hot water heater, furnace, and foundation seem fine. The bare bones of the house seem to be in good shape but I will be getting a full inspection if I move forward.

If I remodel the one side I estimate about a 25-30K rehab cost and I am able to get $1600 out of it in my area.

Let me break down the numbers. If I put 10% down (because I don't have enough cash on hand for the full 20%) my mortgage should be about $2000 (including PMI) a month if I get the house for 280K. In my opinion 280k Is the max I'd pay for this house.

Mortgage:$2,022

Total estimated cost to get the place up and running: $62,800 (Down payment+Rehab+Closing costs)

Total rent:$3,000

Cash flow:$977

If my math is correct the ROI should be about 20%

Do you guys think this could work and am I missing anything?

Also do you think offering 250K first is too low and would it anger the owner?

Whats the max you'd pay?

Natalie Kolodij · Answer

You're missing taxes, vacancy, repairs, maintenance, landscaping, pest control, ect.

IF he'll take $280k this rule barely makes it into a 1% deal. It's not terribleeeee but not something to throw a party over.

Will Fraser · Answer

@Justin Martillotti good work finding a deal and analyzing it with some insider info from the tenant!  The math on the Principal, interest, taxes, insurance, and PMI pencils out to me and IF all of this went according to what you laid out it's a win IMO.  Personally I like anything north of 10% ROI if I have the cash on hand, so 20% floats my boat.

The thing to triple check on this is:  can you use a 10% down loan on this?  If you got all this info from a lender who has already been working with you then great!  If not, then there's a chance you're consider a non-option.

If you were living in the house then a mortgage loan could be as low as 3% down, or 20% down to avoid PMI.  Anything below 20% incurs PMI.  If you won't be living in the property then a mortgage loan will typically be limited to 20% down (or 25% down depending on the bank/broker's discretion).  That will be required for it to be a secondary market loan, meaning a loan at the interest rates you see advertised everywhere as "awesomely low".

Otherwise you'll probably be looking at a commercial loan, which is amortized over 15-years, 20-years or some other time frame, and with an interest rate that varies with some frequency.  Right now most commercial loans are 1.25% or more ABOVE those awesomely low conventional loan rates you see advertised.

So, first things first:  get in touch with your lender and make sure the things you are basing assumptions on are in fact possible.  I'd love to know what you find out here!

Regarding low offers:  I think that totally depends on your agent (if applicable) and your market.  If your agent is GREAT and your market is soft, then go for it.  If your market it hot or your agent isn't sharp, then don't risk ticking off the seller over a low-ball offer.

Christian Rojmar · Answer

@Justin Martillotti Do you have a lender willing to give you  a loan at 10% for an investment property and what is the rate for such loan? Typically it is between 20%-25%. I have found one lender willing to do as low as 15% but rate was quite a bit higher than at 20%-25% down.

Now to your analysis - what are your goals? Are you buying for appreciation/cashflow/other? What kind of returns are you looking to achieve?

As for expenses, I assume the $2,022 mortgage include interest and taxes? I do not see insurance costs in your expenses?

Where are all the cap ex? I typically consider between $120-$180 per month in cap ex for a single family home depending on condition of home and how long I will keep the property for. This would be higher for a duplex.

Where is the vacancy expenses? I typically consider between 5% and 8% for vacancy depending on area etc.

Will tenants pay all the common expenses - sewage, water, gas, electricity, garbage, lawn care? If not, need to add those.

Are you planning on managing property yourself? If not, need to add property management fees as well which tends to be around 10%-12%. If not, are you planning on finding tenants yourself as well? If not, there is an expenses there.

I would personally figure these additional costs out before deciding on how much to offer. In today's market, I would be surprised the owner would be willing to sell at 80 cents on the dollar but doesn't hurt to try.

Sebastian Marroquin · Answer

talk to your agent: and be creative.

Think about maybe doing a hard money loan: and offering "cash" at $240k (assuming that is a good deal). then refinancing into a regular loan: assuming you have loan commitment from your bank. (do your numbers before committing to this).

Also, look at your market: it may make more sense to market for your own off market home (tell your realtor to get you a list of properties you would like to go after).

Red flag number 1: property on the market for a year.... over priced for sure  100%  and or some major problems

Offer $200k or 250k and take them down after inspections.

Don't be afraid to insult people... or negotiate etc

Justin Martillotti · Answer

I'll have to talk to my lender about the 10% if not I'll try and find the 20%. I could also try pitching seller financing once I do more research on it.

My goals are to buy, hold and rent. I want to be able to purchase one property a year and be able to retire at 50 or so.

I should have been more specific with the mortgage number. The $2022 includes Principal, tax, insurance, interest, and PMI (if dp is under 20%)

I would probably have the tenant pay all utilities except maybe sewage.

As for cap-ex, I'm not sure how it even works. I'll have to look into this.

I'm planning on managing the property myself using an app like Cozy. I'll look into a PM down the line if properties start building up.

Thanks for all of this info it helps a lot!

Alex Nelson · Answer

I would recommend checking out the BP Calculators. Even free members can do i think 5 free calculations using them. This will give you the ground work for all of the extra expenses that you need to look out for. I'd also recommend catching one of @Brandon Turner's podcasts where he analyzes a deal. You'll get to see first hand what all needs to go into your calculations.

I noticed (as @Natalie Kolodij pointed out) that you haven't accounted for any additional expenses over the PITI. This could (read WILL) sink your investment. you need to account for management costs, maintenance, Capital Expenditures, etc. If you don't plan for these, that 20% investment could start looking a lot more like a 2% investment once some expenses start coming your way.

Just be sure to do all your research before jumping in. I highly recommend purchasing the "The Book on Rental Property Investing" that they publish here. (https://www.biggerpockets.com/...) It will put all the information that you need in one place and in an order that will make the most sense.

Justin Martillotti · Answer

@Will Fraser thanks, some great info here that I never thought about, I appreciate it. I do have a lender set up but Im not sure if 10% is possible so I'll shoot him an email and see what he they can do. Also the property has been on the market for over a year which could be a sign that something is really wrong or the seller is just stubborn on the price. I'll talk more with my agent about that as well. He is currently trying to get me the sellers disclosure. I'll let you know what I end up finding.

Thanks again!

Could this Duplex be as profitable as I think it is?

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