Is this a good deal?

Buying & Selling Real Estate
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Is this a good deal?

Sheena Varghese
Realtor · Orlando, FL · Member since 2015 · 80 posts · 33 votes

Hello,

I am new to investing so I would love to hear some feedback on an opportunity I have come across.

I am looking at single family home that has been converted to duplex (1,990 sq ft).  The property is in central Florida, about 10 blocks from the beach.  It's in a fair area, not great but not a war zone.  Both units are rented currently.  The first unit (1 bedroom 1 bath) is rented for $650 per month.  Second unit is 3/1 and rented out at $900 per month.  Owner pays utilities $400/month.  

It's an owner financed only option.  $20,000 down and $414 per month for 30 years.  

Total monthly rent:  $1,550

Mortgage:  $414

Utilities:  $400

Property Tax:  $87

Insurance:  $70

Vacancy & Repair:  $310

Net profit monthly:  $279

I plan on doing a through inspection to make sure there is nothing major going on.  Also, i plan on refinancing at a much lower interest rate so that the mortgage amount is lower.  

What do you guys think?  Is this a good deal?  Thank you in advance for your time and help!

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Aaron Thivierge
Investor · Jacksonville, FL · Member since 2014 · 172 posts · 73 votes
11y

One concern not mentioned is "single family home that has been converted to a duplex".  Is this properly permitted?  You need to consider your exit strategy before you purchase any real estate. 

What if this was duplexed from a SFH by a "skilled handyman" w/o permits? You will have a very difficult time selling it in the future if it's not legit (maybe that is why seller is refusing conventional financing)...

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  • Ramon Jenkins
    Real Estate Agent · Milwaukee County, WI · Member since 2009 · 3k+ posts · 525 votes
    11y

    Purchase price ?

    Capex ?

    Property Management fee ?

    After repair value ?

    1Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    11y

    @Sheena Varghese

    The cash flow is a light after adding a 10% management fee in there.

    I'm never a fan of places where the owner pays electric bills.  Up here it's "leave the windows open and crank the heat to 80!"  Is there some sort of cap on the amount they can spend each month?

    I assume the asking price is about 100k?  Leaving you with ~80k on the note.  Do you know what the most recent appraisal was?  It will take a while for you to become conventional refi eligible if you are only at 20% equity.  

    Is the place a good deal?  Owner financing doesn't make it automatically so.  Could you come up with another $5000 down and drop the monthly mortgage payment further?

    1Reply
  • Ramon Jenkins
    Real Estate Agent · Milwaukee County, WI · Member since 2009 · 3k+ posts · 525 votes
    11y

    Anyway to have future tenants pay for utilities?

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Heat

    Electric

    Water

    Trash

    Sewer fees 

    1Reply
  • Derek B.
    Greensboro, NC · Member since 2014 · 212 posts · 143 votes
    11y

    @Sheena Varghese  Whats your purchase price? I could reverse math to figure it out but don't know the interest rate on the seller carry.  Can you pass on the utilities to the tenants? Are there separate meters for everything?  How would you really grade the area.  There's a lot of space between "fair" and "war zone" so try to narrow it down a bit. Example:  why would someone on a 650/900 budget choose to live there? Would you live in that area if that was your budget?  The grade of the neighborhood and the resulting applicants/tenants makes a big difference. You don't have allowance for property management so I assume you are managing yourself. You should consider a capex funding in addition to repairs. 

    1Reply
  • Sheena Varghese
    OP
    Realtor · Orlando, FL · Member since 2015 · 80 posts · 33 votes
    11y

    Thank you for the replies!  Sorry, forgot asking price, it's $55,000.  Yes, thinking of changing up the utilities to having the tenants pay depending if there are separate meters, etc. 

    0Reply
  • Sheena Varghese
    OP
    Realtor · Orlando, FL · Member since 2015 · 80 posts · 33 votes
    11y
    Originally posted by :

     You should consider a capex funding in addition to repairs. 

    Is Capex funding for upgrades?

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  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    11y

    Holy Cow!!  14% on the note.

    Just do conventional on this one.

    2Reply
  • Ramon Jenkins
    Real Estate Agent · Milwaukee County, WI · Member since 2009 · 3k+ posts · 525 votes
    11y

    capex 

    Big ticket items ( saving for a rainy day funds )

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Roof, Furnace, water heater, AC, electrical system, plumbing, windows,

    siding, kitchen, baths, floors, insulation, and etc

    Typically between 6 % - 9%

    0Reply
  • Darren Budahn
    Investor · Milwaukee, WI · Member since 2014 · 811 posts · 420 votes
    11y

    Yeah, paying 14% on the note does not make sense.  It seems like you have the cash.  Just get a conventional loan.  

    0Reply
  • Jesal Patel
    Lincolnwood, IL · Member since 2015 · 4 posts · 3 votes
    11y

    This is likely not as good a deal as you can find in your market.  If rents can be maintained and tenants pay utilities the investment becomes much more attractive.  Also, keep in mind that proximity to the ocean has the potential to substantially increase the cost of ongoing maintenance and the cost of retenanting.  

    2Reply
  • Sheena Varghese
    OP
    Realtor · Orlando, FL · Member since 2015 · 80 posts · 33 votes
    11y

    The owner won't do conventional loan, makes me think it might not pass inspection with conventional loan.  Thanks for the input everyone.  I am going to see how the inspection goes and if I can pass on the utilities to the tenants. I  plan on taking a line of credit to pay off the seller.  That should bring the net to about $380.  That seems like a good number.  Am I missing anything here?  TIA!

    0Reply
  • Alexander FelicePro Member
    Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    11y

    he won't accept a conventional loan?

    Seems like the guy just wants to earn his 14% and no way around it. Deal seems good but I'm not sure it's worth it. 

    I wonder if you can put together a traditional seller finance mortgage, agree to his terms but then just pay him off early. If he sticks you with 14% and no ability to pay early, I would pass. 

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    1Reply
  • Scott Wagoner
    Investor · Lake Mary, FL · Member since 2015 · 62 posts · 21 votes
    11y

    @Sheena Varghese

    I dont see this as a "good deal" at all! I am in the Central Florida area and I can find single family homes that could bring that return monthly + a whole lot more and not have to worry about paying the tenants utilities.

    I literally just sold (closed 2 weeks ago) a single family home to an investor of mine that looked like this:

    $45K was his purchase price with an ARV of $80K (coming from 2 recent flips on the same st)

    I put him in touch with my handy man who put in all new tile and framed in a door way for him for less than $2500....he already has a tenant paying $950 a month.

    Not meaning this to be an advert, more of just heads up that there are other WAY better deals out there.

    0Reply
  • Aaron Thivierge
    Investor · Jacksonville, FL · Member since 2014 · 172 posts · 73 votes
    11y

    One concern not mentioned is "single family home that has been converted to a duplex".  Is this properly permitted?  You need to consider your exit strategy before you purchase any real estate. 

    What if this was duplexed from a SFH by a "skilled handyman" w/o permits? You will have a very difficult time selling it in the future if it's not legit (maybe that is why seller is refusing conventional financing)...

    3Reply
  • Gilbert Dominguez
    Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
    11y

    I agree, one of the first things you should do is head down to your local building department and check out the zoning of the property. If is not a legal duplex run, stay away from the deal. There is not reason why the owner would refuse conventional loans unless like mentioned he wants to stick you with the 14% interest. It does sound to me like its not a legal duplex so please make sure of verifying that at your local building department. Give them the address and go the the county assessor's office and get the assessor's parcel number, you will need that to verify the zoning then you can also ask for a permit search which the city building department will do for you in the case the duplex was not original and has not been permitted. Sometimes owner financing is a trap for selling you illegal property. Definitely change the rental policy to have the tenants pay their own utilities or share the cost if there is not separate metering. If the duplex is legal then looking into putting in separate metering if that is non existing now. Make sure you can pay the mortgage early without penalties otherwise do not do the deal. Like mentioned by others there are plenty more and better deals to make. 

    1Reply
  • Sheena Varghese
    OP
    Realtor · Orlando, FL · Member since 2015 · 80 posts · 33 votes
    11y

    Thank you all so much! Aaron Thivierge and Gilbert - sorry, can't seem to figure out how to tag people... thanks for info on permits, def looking into that.

    0Reply
  • Aaron Thivierge
    Investor · Jacksonville, FL · Member since 2014 · 172 posts · 73 votes
    11y

    @Sheena Varghese



    The way to tag someone on the post is a.) they must be on the thread to begin with and b.) type "@ then the person's username (no space between @ and the persons name by the way...)"...the person will then appear beneath the typing box in a blue highlighted font.  Simply click on that name, and they are "tagged" in the post and alerted via the message center on Biggerpockets.  Give it a try. 

    0Reply
  • Sheena Varghese
    OP
    Realtor · Orlando, FL · Member since 2015 · 80 posts · 33 votes
    11y
    0Reply
  • Sheena Varghese
    OP
    Realtor · Orlando, FL · Member since 2015 · 80 posts · 33 votes
    11y

    @Aaron Thivierge - - thanks, it worked! =)

    1Reply
  • Sheena Varghese
    OP
    Realtor · Orlando, FL · Member since 2015 · 80 posts · 33 votes
    11y

    @Aaron Thivierge @Gilbert Dominguez

     - you both were right, no permit for duplex.  The seller is asking for 3% penalty if paid early...It looks like there are 3 tenants now not 2.  My real estate agent says these are common in some areas (no permit deal) and that he still thinks it's a great deal.  I think there are so many unknowns with this...wondering if I should move forward with the inspection... any thoughts?  TIA!

    0Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    11y

    Well, for what it's worth @Sheena Varghese, I don't like the numbers and I don't like the seller's insistence on carrying the note. You already found out about no permits, that leaves the zoning question and the inspection. 

    If it was me, I'd be dinging the seller on the no permits - even if it's not their fault - and lowering my offer. Bad inspection outcome? Lower still.

    Don't "marry" the deal - "it's just business". If it doesn't make business sense, don't do it.

    1Reply
  • Gilbert Dominguez
    Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
    11y

    The thing is there are so many real estate deals out there that you do not need to be a part of a bad deal or even a potentially bad deal. Like David said if the numbers do not work nothing else will and think of the problems you can have in the future if you buy an illegal unit. I also do not like it when an owner financier wants to force you into his deal so he can earn a high interest rate, not the best of situations. My take on this is move on and look for a better deal where you are already dealing with a legal property and if you need the owner financing then find one that is in your best interest. 

    There is good business and bad business and people will give you bad business up to your eyebrows if you let them. The thing about real estate investing is that you will learn there is only one kind of business that makes any sense to do and that is good business. 

    Let us say one of your tenants found out that you rented them an illegal unit what potential problems could that lead to ? Consider Murphy's law , " if something can go wrong it probably will". Is this the foundation you want to build for your business? Everything you work for and build over the years can come crashing down on you. Luck should never be something you depend on to keep and run your business. Its great when luck is on your side but luck should not be a part of forming the foundation of your business. 

    1Reply
  • Gilbert Dominguez
    Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
    11y

    Further let us say a code enforcement official found out about an illegal multifamily unit. He could order you, the owner to bring everything up to code and only use the building in the manner the law and code allow. Would you have to evict everyone? could you be exposing yourself to a lawsuit? could you deal with the expense of paying for the down time and a 100% vacancy rate while you ironed out all the issues?

    Layout a solid, legal, ethical, and proper plan for your real estate business and career. Believe me you will be glad you did. Do not leave yourself open to potential liabilities. In future times when you will have put allot more effort and even you own money into your business you will want to have peace of mind so you can concentrate of growing your business on a solid and protected basis. 

    1Reply
  • Sheena Varghese
    OP
    Realtor · Orlando, FL · Member since 2015 · 80 posts · 33 votes
    11y

    @Gilbert Dominguez@David Dachtera  I really appreciate both of you for sharing your insights.  @Gilbert Dominguez - I didn't realize all the potential problems lack of permits can bring.  After considering all the cons (mostly) and pros, I have decided to not move forward with this deal.  I think I will keep looking for a semi "normal" deal for my first investment property =)  Thanks again!

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  • Gilbert Dominguez
    Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
    11y

    Good for you Sheena, I agree with your decision and I am happy to see that this time you decided to avoid the very likely potential pitfall you might have gotten yourself into. Have confidence and work only on good deals that is the way to build something lasting and that you will enjoy. Its also the way to assure you do this business profitably and there is no other way or reason to do it unless you are sure you are doing something that will serve you well and help you enjoy your life more.

    I wish you the best Sheena and keep coming back to BP. They say two heads are better than one and we are all here to help, support, or advise each other. 

    In the over 30 years I have been involved with real estate I have met, seen, or known allot of people suffer because of getting involved in the type of deal you made the subject of this post. 

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