Will that be a good buy?

Question

Hi Team,

Can someone help me determine if this deal is a good deal or not? It's a duplex in the Atlanta, GA area.

The asking price is: $118K

The house will need some improvement to raise the value. Estimate work: $25k

The ARV: $125K

NOI: $9,700

C0C ROI: 10.71%

Currently rent at $600 which could bump up to $700 per unit after repair.

I wanted some room on the investment so the house does not go over market value after repair. I put an offer for $100K but the seller counter my offer with $118K. Please help me calculate this deal.

Thank you team.

Jon Holdman · Answer

They won't go below $118K, it needs $25K of work and that would make it worth $125K.  So you would have to spend $143K to get a property worth $125K.  What's your question again :-)?

Mitch Messer · Answer

Hey @Watson Josue! The response from @Jon Holdman says it all, but I would also add that your numbers seem suspect.

First, NOI: At $600/mo/unit, you're looking at Gross Income of $14,400 annually. Your calculations assume Annual Expenses of $4700. Did you arrive at this number by factoring in property taxes, insurance, vacancy, maintenance, and management, or did you just assume it would be  33% of income?

Those back-of-the-envelope ratios can really get you in trouble: I strongly recommend always using actual data and conservative (if not "worst-case") estimates for expenses. Here in Metro Atlanta, property tax data are just a Google search away. Any decent insurance agent can quote you an annual policy premium. Management expense is pretty standard at 10% of rent. A vacancy rate of 1/12 (8.3%) is pretty safe. You get the idea.

Second, Cash-on-Cash Return is cash coming out divided by cash going in. If your cash out is truly $9700, and you paid $100K to acquire plus $25K to renovate, your CoCR is 9700/125000, which is 7.76%, not 10.71%. And that's not including transaction costs or holding costs.

Watson Josue · Answer

Hi Mitch,

As the first timer, I think I was miscalculate this deal. Somebody has countered my offer on that deal, well not too bad then. Will it be possible to connect?

Thank you for the explanation.

Watson Josue · Answer

That says it all. l just estimated the amount of work it take based on touring the property.

Thanks.