I found another duplex I want to buy, but WTF?!

35 Replies

So I found a duplex in a desirable neighborhood in my area and I want to run the numbers by you guys.

Asking Price: 350k
Gross Rent: 2000

I can do owner occupied financing with 3.5% downpayment and I'm assuming a 4% interest rate on a 30 year fixed. Property taxes in California are 1% of assessed value, and this property was previously assessed at 347k.

If I offer 200k on it, it's WAY negative. I can offer 95k on the property to get it to cash flow $100 per unit net income. Are my numbers WAY off or WTF? Who the hell is going to buy this thing???????????????

Can I get a sanity check on my expenses?

At 95k it pencils out:

At 200k (150k below asking price) I'm -$295.94 a month NET cash flow:

I am using general estimates for my CAP EX costs. I realize this could be off, but even if I didn't account for CAP EX at all I couldn't make it positive cash flow at 200k purchase price

@Brian Zitzow you only have to live there for one year to meet the residency requirement (check this to be so super sure) then you can rent both sides, bringing your rent to $4k ... would that make the deal work better?

If you offer $200k and they accept (for example) then you basically pay $300/mo in rent for a year.

I don't know what your market is like, but weird number don't necessarily nuke a deal.

Alternatively, this may just not be the deal for you ... don't be afraid to let it go if the numbers don't hash out.

Originally posted by @Jeremy Pace :

@Brian Zitzow you only have to live there for one year to meet the residency requirement (check this to be so super sure) then you can rent both sides, bringing your rent to $4k ... would that make the deal work better?

If you offer $200k and they accept (for example) then you basically pay $300/mo in rent for a year.

I don't know what your market is like, but weird number don't necessarily nuke a deal.

Alternatively, this may just not be the deal for you ... don't be afraid to let it go if the numbers don't hash out.

 Actually, both sides are rented right now. One for 1050, one for 950, which puts gross rents at 2k. I cannot get the 4k gross rent by renting both sides like you suggested. :(

Originally posted by @Matthew Paul :

Some areas due to the cost  just dont work 

 I think that may be true here, but after looking at the numbers - I'm truly wondering: Who in their right mind would buy this thing for asking price? haha

Originally posted by @Jeremy Pace :

@Brian Zitzow in that case, you can't buy this at all, because if you don't live there, you can't get that super low FHA downpayment ... you'd have to put down 25%

 I'm confused. Why can't I live there?

@Brian Zitzow

well, it's a duplex, and both sides are rented ... if you vacate one side ... the numbers will be even more atrocious ... what are you going to do, sleep on a cot in the basement?

The only way this is a good deal for you is if a SFH in the same area costs $350k, in with case you're getting a 2-for-1 bargain.

Brian. You are looking at one year flyover financials for a CA property. Fine for them because rents and value don't change much.

For CA you need to factor rent growth an appreciation.  Check what similar properties sold for 10, 20, 30 years back. 

Also a 10% vacancy is generally too high for CA.

Also the first thing you need to do is establish the market value of the property.

@Brian Zitzow

Are the rents market rate or they they below? Can you increase the rent. You need to know your market to make things work. Don't use general Vacancy rate of 10% and Property management of 10%.   What is the area's local Vacancy rate? I am not familiar with Roseville but in San Jose where I am the Vacancy rates are much lower 2% or 3%. I I assume 5%  to be conservative. The property management is lower than 10% in San Jose. It is around 6%  so find out what it is in your area. 

Don't make assumptions. Like Bob said above you need to see how the area appreciates and also the rent growth in the area.  

In the end even after you look all these the property may not work out but  you get a more realistic idea to move forward.

I just purchased a duplex that I am house hacking for 160k, both sides renting for 1k (currently only 1 side rented for 1k, but running numbers as if both were). I can show you my numbers and see how they compare to yours as a general idea. I also used 3.5% FHA loan and once I move out, with 2k gross rents, I'm cash flowing ~$250/month. This includes 4.2% vacancy and 10% PM, but I self manage. So actual cash flow is more like $500/month without vacancies. Taxes are about $3,400/year and insurance is around $1000/year, capex/maintenance I calculated to be around $300/month. PITI is around $1200.

Originally posted by @Matthew Paul :

Some areas due to the cost  just dont work 

 I think that is why South Carolina . Along with most Southern states are so attractive to out of investors the numbers work here.

I'm from Ny originally and trying to make numbers work there most times ( no go )

Just my two cents

Alex

Originally posted by @Brian Zitzow :
Originally posted by @Matthew Paul:

Some areas due to the cost  just dont work 

 I think that may be true here, but after looking at the numbers - I'm truly wondering: Who in their right mind would buy this thing for asking price? haha

 If you are in an area with many investors with a lot of cash they can push prices up. You are buying as an owner occupant with only 3.5 down and mortgage insurance. Your costs will be much higher than the average investor who is buying with 20 percent down and no mortgage insurance. If you are in an area with high housing prices many investors will buy with cash and are happy with single digit returns. 

Originally posted by @Jeremy Pace :

@Brian Zitzow

well, it's a duplex, and both sides are rented ... if you vacate one side ... the numbers will be even more atrocious ... what are you going to do, sleep on a cot in the basement?

The only way this is a good deal for you is if a SFH in the same area costs $350k, in with case you're getting a 2-for-1 bargain.

 lol too funny great response ! a Cot in the basement! =D

Originally posted by @JT Spangler :

The only person that would buy that is someone who's developing it, or buying for appreciation.

 Or they are buying it to have a place to live with have a little bit of payment offset (renting the other unit) and not as a fully self sufficient investment on its merits. 

Originally posted by @Albert Bui :
Originally posted by @JT Spangler:

The only person that would buy that is someone who's developing it, or buying for appreciation.

 Or they are buying it to have a place to live with have a little bit of payment offset (renting the other unit) and not as a fully self sufficient investment on its merits. 

 My answer presupposed that the initial question was actually asking, "Why would a good investor buy something like this?" Since bad investors will do all sorts of crazy things. :)

Originally posted by @Bob Bowling:

Brian. You are looking at one year flyover financials for a CA property. Fine for them because rents and value don't change much.

For CA you need to factor rent growth an appreciation.  Check what similar properties sold for 10, 20, 30 years back. 

Also a 10% vacancy is generally too high for CA.

Also the first thing you need to do is establish the market value of the property.

 10% vacancy is not always a loss from vacancy though, it includes cost to repair and turn the unit + loss of rents so it could vary well be 10% in some areas even though vacancy is 3-4% (rougher area class C-D tenants) vs. class B to A tenants). I've had unit turns that cost over 2-3 months of rent and that wasnt a full renovation either.

But from a general overview I am not sure what number I would use. I am just saying in my actual experience it has been a bit higher when not factoring the cost to turn a unit.  

@Brian Zitzow I just wanted to add another note. Cash flowing with FHA loan is going to be very hard where we are in the cycle in Bay Area. Just a nature of things here.

Just make sure you analyze multiple properties in the area to figure out what it is you are looking for is there on the market. It may very well be that you won't find the returns you are looking for on MLS may be easier off market but even that might be hard.

Good luck.

I rarely see a duplex/triplex/4plex in the MLS that looks good on paper even with putting 20% down. Even the couple non-MLS I've seen in the area don't make sense. The ones I do see that make sense are in D/F neighborhoods.

Originally posted by @Derek Jones :

I rarely see a duplex/triplex/4plex in the MLS that looks good on paper even with putting 20% down. Even the couple non-MLS I've seen in the area don't make sense. The ones I do see that make sense are in D/F neighborhoods.

 It is exactly the same way in Miami.  The rent rates just dont justify the purchase prices.

I regularly see duplexes asking $450k that would bring in a total of $2,700 or so in rent. The issue, I believe, is that the duplexes are not valued like other commercial property. The sellers are NOT looking at the income stream in order to value the property. Rather, they are looking at comps in the area, like any other SFR. And if they see the 1800 square feet 3/2s in the neighborhood selling for $275k, then they're are going to look at the duplex (which is larger, with more bedrooms, more bathrooms, and an extra kitchen) and value it at $350k (or whatever, for this example). So the expecation, and the asking price, is simply not tied to the rental income it is capable of producing. Unfortunately.

In that area, you need about 25% down to be cash flow neutral.  Homes appreciate more where we live so it's factored in to the price of residential property.  Also, you don't seem to have utilities factored in. In most duplexes there aren't separate meters per unit so the landlord ends up paying for the complex.