Analyzing our First Duplex! Is it a good one?

Question

Hello BP family,

My wife and I had the opportunity to look at a duplex last night. We love it and want to jump on it, but the numbers are not the typical ones I see.

Price: 250k (we live in rural Indiana)

Units: 2 (1000 SF each) 2 B 2 BA

Large lawn, built in 2004, no capex costs for atleast 5 years hopefully (roof has 10 yrs left, HVAC maybe 5)

Tenants do all the yard work.

Rent is at 850 for both sides

My question...

This is more expensive than I would have liked, but this place is so clean, maintenance is minimal, and there are 2 lifelong single lady tenants in there now, is this a good deal, even if my CoC return is so low? (7.3%)

I think this can cashflow 4k-5k a year, but the risk is very low.

Mark Plesha · Answer

Hey @Caleb Ray, personally I would want to be closer to at least the 1% rule (proportion of rent to purchase price) when analyzing a property. Are you running your numbers based off what the loan would be if you are bringing 20% down, that is the only way I would see how it would cash flow based off of the numbers given. If you have the capital for a large down payment and enough in reserves for when basic repairs come up or if you have a problem with the well or septic (just a guess that you have those since you said you are in rural Indiana) then maybe take a chance at it. Based on the numbers, I would guess you would actually lose money most years at that purchase price and I would try to look for something else. Make sure you are including taxes and insurance costs and at the very minimum 5% for each of the following; vacancy, repairs & maintenance, property management (just because your are managing it now, doesn't mean you always will) and cap-ex. The BP calculator for rentals is a great tool for analyzing properties. Good luck with whatever you decide, sir!

Darius Ogloza · Answer

Caleb: not sure how you are calculating but your numbers seem off.  Are you including principal & interest, taxes, insurance and utilities/sewer in your calculations?  Your mortgage should be about $1,000/month alone.

Scott Swanson · Answer

Caleb,

I question your 7% return. I think Darius spelled it out already though. You also have to include maintenance on the "inside" of the apartments and also vacancy, when you calculate your return. You might want to look at something less expensive, with higher rents. For example, we got an investor a duplex for $94k and the rent total is $1700 a month. So the return was very high. Best of luck.

Caleb Ray · Answer

For sure good points. The ladies hire people to do the yardwork, so I am not super concerned about that.  I guess the trade off for this is the amount of work we have to put in will be minimal. I am thinking we would have to go in at 235k to ease my mind on it.

I think down the road it could for sure use some updating (older carpet, cheap wood flooring, old cabinets) but then again it is Indiana and adding that stuff to a duplex doesn't add much to the value.  I don't think it is risky per say, but this property would be a purchase more for the equity we can build, not so much the cashflow is how I am viewing it. I am a mix of emotions on this one I guess. Would you rather have a higher cashflow property that has riskier tenants/repairs, or a more hands off, less cashflow property?

Jaysen Medhurst · Answer

I don't see how the numbers work out on this property, @Caleb Ray. Even with lower expenses for repairs, maintenance, and vacancy, it looks super tight. I came up with <$300/month before considering taxes, insurance, water/sewer, etc.

I don't think I'd do a 7.3% CoC ROI deal unless I saw value-add opportunity or better-than-average appreciation.

Those single ladies sound like easy tenants who will likely stay there a long time, which is great. What's the trade-off, though? Will you have the ability to keep rents at market when they retire and are on a fixed income? They take care of the yard work now, but what happens down the line? You may find yourself in a spot where they aren't able to take care of the property they way they have been (increasing your expenses) and not in a position to pay market rents (decreasing your income).

Analyzing our First Duplex! Is it a good one?

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