First-time post: Deal Analysis

8 Replies

This is my first post to the BP community (after listening to about 50% of the podcasts).

Quick background: I'm in Yakima, WA. In 2006 I flipped two properties (for a profit!) and in 2007 I bought a duplex as a buy-and-hold. I am not living in either unit. I haven't done a single real estate transaction since! My tenants have been great and I haven't experienced a single vacancy, though I have had some turnover. (Why have I waited so long? I think it's because I'm afraid that there's no way my next deal will go so well. The bar is set too high!)

I now have the opportunity to purchase the duplex next door which shares an irrigation system with mine. (Somehow I feel this means I should own it.) This is a 1970's era duplex, identical to the one I currently own. I believe it would be considered a Class B property. The seller has had cash flow problems in the past and, as a result of those problems, he has done ZERO maintenance in almost all of the 9 years he's owned the building. I estimate that there are $15-$25k in both deferred maintenance and updates that needs to be taken care of.

The seller purchased the property in 2007 for $211k and told me he's willing to sell it to me today for the low, low price of $230k. No thank you. After I pointed out all of the maintenance issues that need to be taken care of, he told me that he would consider selling it "as-is" for $210k.

Running the numbers, it doesn't seem to compete with all the great deals I hear about on the podcasts, but I'd like to at least run it past you all for comments. I'm also curious to know if any weight should be given to the fact that I already own the duplex next door (with that shared irrigation system). Perhaps this is the beginning to acquiring the whole block? :)

Let's assume I'm able to talk him down to a purchase price of $200k. (FWIW, I know that he is unwilling to sell for less than $200k.)

Gross Rents: $1825/mo (doesn't meet the 1% rule)

5% Vacany: $91.25/mo (this is a conservative number for our area)

Insurance: $60/mo

Utilities: $125/mo

10% Maint: $182.50/mo

10% CapEx: $182.50/mo

Property Mgmt: Self

R/E Taxes: $190

NET OPERATING INCOME: $993.75

20% Down Payment: $40k

Closing Costs: $3k (ish?)

30 year amortization: $160k @ 4.25%: $787.10/mo

MONTHLY CASH FLOW: $206.65 (~hundred bucks/door)

ROI/Return on Down Payment: 6.2% (nothing exceptionally impressive)

ROI/Return on Down Payment + Closing Costs: 5.8%

Debt Coverage Ratio: 1.26

Earlier I mentioned that the place has $15-$25k in deferred maintenance. Not all of this would need to be done immediately. Most of this could be spread out over the next couple years. Much of it could be covered by the CapEx set-aside.

Once the property is fixed up, it should be worth $240-250k and this increase in value is not shown in the numbers listed above. I'm not sure how to factor that increase in value for a long-term buy-and-hold property.

While the return in year 1 isn't all that impressive, I realize that over time rents will increase, the mortgage will be paid down and maybe there will even be some appreciation.

So, do I make the deal or keep looking for another property to buy-and-hold?

Thanks, in advance for your analysis and advice.

Sam

Hey Sam, 

I am another Yakima investor, and here are my two cents. The numbers don't look terrible, but that also means they don't look great. :/ By the numbers you can probably do better, but will another property be as convenient? It is next to your other property. You have experience dealing with this type of property. 

Based on your description, you may be able to implement BP's favorite BRRR strategy. Buy, do a little rehab, then rent and refinance. Having both duplexes may also contribute to a nice portfolio that you can sell together to a different investor.

Good Luck Sam! 

Thanks, Jeremy!

Yes, the experience I have of maintaining a similar property is a value I hadn't really quantified. Also, I can see the value in someday selling both properties as a portfolio. Thanks for making that point.

Now, do I spend the time and energy trying to find a GREAT deal or "settle" for a mediocre deal that kind of ended up in my lap? I suppose it will ultimately come down to me needing to make that decision.

Sam

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Hi Sam,

Are these units 2 BD, 2BA or 3 BD, 2BA?  

While I don't own an rentals in our area, the buyers I work with think that your vacancy rate shouldn't be as high as he was experiencing.

Thanks, Micheal. I appreciate your input! These are 3/2's. I know that the vacancy rate in Yakima for these units are more like 1% right now, which is amazing. But I prefer to be cautious and conservative when analyzing a deal.

What is the size of the property? Your CAPEX is much lower than I would use, especially if this is for two 3/2 units.

Keep in mind repairs and CAPEX are not dependent on rent.

Deal seems a little thin to me--$200/mo on a $40k cash investment is around 5% coc return--and that assumes the optimistic CAPEX you listed.

Frank,

Thanks for the response. Yes, you're right, repairs & CAPEX happen regardless of whether or not the unit is vacant and shouldn't be completely dependent on gross rent. Thanks for the reminder.

This is a duplex. Both units are 3/2. About 1200sf/ea. The current gross rent of $1825 is close to market rent.

How do you determine the right CAPEX amount?

I agree that the deal isn't spectacular. The reason I'm considering the purchase is that the building is located right next door to my existing property. The two properties share an irrigation system and have identical floor plans. Is this enough reason to buy the property? I'm not sure. This would be a long-term hold and while the initial investment seems weak it could be very well worth it in the long-run. Also, the idea of owning rental real estate located next door to each other sounds convenient. Any additional thoughts?

Sam

Since I'm not investing, I can only come at it from a Realtors perspective.  Being able to present your portfolio (when you're ready to sell) and say that you own both parcels with a shared irrigation system does make the deal way more appealing to the buyers I represent.

Good to know, Michael! Thanks.

Unfortunately, the seller is telling me that he's no longer interested in selling! Argh! He says that he's willing to handle some of the deferred maintenance himself instead of unloading it at a "fire sale" price. I suspect that it's just a matter of time before he changes his mind again.

I wish there was some way I could motivate him to sell other than price. I think he's fixed on $210k (but I might be able to get him as low as $200k) with some tough negotiating.