Please help me think about and analyze this deal.

[Heather Rodden]

I found a duplex somewhat locally, I’m trying to make it work, but am new to analyzing property.  The asking price is $165,000, rent currently is $750/side. 2 bed 2 bath. It also has an empty lot that comes w it. Taxes are $3111. It is rented on both sides w tenants that have been there 3+ years. Fair market value of rent for the area is $974, so there is room for increasing rent. Property is well maintained, 10 yr old roof. I don’t see a lot of maintenance cost other than lawn care. I just want to see what other investors think of this deal, what you would offer, and what kind of return you like to get back. Thanks!

[Kevin Sobilo]

@Heather Rodden, a few thoughts:

1. Find a decent calculator or spreadsheet to do calculations through. There are MANY ways to look at an investment like this and some will be less obvious to you at the start but unless you see them you may never come to learn what they are about. 

2. On the surface it looks like a deal that is worth analyzing more thoroughly mainly because there is room for raising rents. 

3. Identify ALL the expenses you will need to pay or budget for both hard expenses and soft ones. 

4. Hard expenses are things that are known like mortgage, insurance, taxes, lawncare, etc... They may include some utilities as well! 

5. If a utility is provided by a government entity it can generally become a lien if unpaid. For that reason a landlord will usually keep those in their own name to maintain control. 

If the utility bill is based on usage, they will probably bill it back to the tenant each month. 

If the utility is a flat fixed rate, then they will likely bake it into the rent. 

6. Soft expenses are things like capital expenses (roof, hvac, etc etc), maintenance/repair, and vacancy/turnover. A basic starting point might be 5% of income rent for each or 15% total, BUT depending on how you plan to manage and if you plan to do any hands-on work yourself you may wish to budget a higher amount for one or all of these. 

7. I would also find out if these units are currently leased or month to month. If you are prevented from raising rents for a year, that impacts what sales price you may wish to pay. 

8. You ask about what to offer, but that is VERY hard to say. Get a good realtor to work with! They will have a better sense of that. 

Factors on what to offer can include MANY things such as cash or type of financing, doing home inspections or not, etc? The market itself is obviously a factor as is the current owners situation. Does the current owner have any stresses or motivations to make a sale happen. Do they have any financial stresses or maybe they have issues with the tenants themselves even! 

MANY MANY things go into what and how to make an offer. 

9. As an example to #8... 

Once, I went to see a tenant occupied single family. The tenant was supposed to let me into the property but wouldn't answer the door even though they were home. Come to find out the tenant had confirmed many appointments but was denying access and was disgruntled in part because they wanted to buy the property but couldn't. 

Instead of walking away, I IMMEDIATELY went home and within 90 minutes submitted TWO simultaneous cash offers!!! 

One offer was LOW but the tenant could stay in place for closing and I would do NO INSPECTIONS. Only a walk through was required. The other offer was higher (still below asking) but the tenant needed to be removed before closing and full inspections would be done. 

After submitting the offers, I spoke to the listing agent about them. Come to find out the listing agent was from another county and none to motivated to deal with this low value problematic listing. No further showings were being scheduled because of the tenant situation. In addition the owner had NO LEASE, NO SECURITY DEPOSIT, and NO KEYS to the place! 

The more we spoke, the more it because clear that they should negotiate on the LOWER offer where the tenant could remain for closing. 

I was able to buy that house for over 20% UNDER asking price when it should have sold over ask! I was able to remediate the tenant situation and that tenant remains in place today! 

The moral of the story is that 95% of buys saw a "problem", when the problematic tenant situation was actually an OPPORTUNITY! Negotiations are not just about numbers and valuations, many other factors can come into play.