Just Received a Counteroffer on My First Duplex - Need Advice!

15 Replies

Hey BP!

I recently made an offer on a duplex (each unit has 2 beds and 1 bath) that is an hour away from where I live. The duplex is in a town of about 2,500 people while my town has about 60,000. The original list price was $57.9K, I offered $45K and the seller countered at $50K saying that they won't entertain anything less than $50K (I'm sure sellers always say this), but figured I'd mention anyway since my highest offer was going to be $48K. It's been on the market since May 2017 and each unit currently rents for $350. For where it's located, the current rents on the duplex are on the lower end of average, but for calculations sake, I left them where they are. But I need Advice on this deal!

Specs:

Year Built - 1950, Slab Foundation, Brick Veneer Exterior, 1500 sq ft (750 per unit)

Lending Info: Term=20 Years, Interest Rate=4.95%, Down Payment =20%, Closing Costs=$2.3K

Assumed Purchase Price: $50K

Gross Rental Income: $8,400

Property/Landlord Insurance: $1,200

Taxes: $900

CapEx/Maintenance (10%): $840

Property Management (10%): $840

Vacancy (5%): $420

Utilities: Paid by Tenants

NOI: $4,200

Debt Service: $3,154

Cash Flow: $1,045 or $87/month

CoC ROI: 8.5%

From what I see, in it's current condition I'd be earning 8.5% ROI on my cash investment. Tenants are fairly long term (3 years and 1 year) and I think would bear a $25/mo rent increase. Also, one tenant has cat and dog so I'd charge $15/month extra for those. Just adding an extra $65/month would boost my ROI to 14%.

Two main questions

1) Is this deal just too small to be worth it? It would be my FIRST property, so personally I think it would be  a good way to get started. 

2) Should I counteroffer at $48K or try to have repair considerations/seller credits for minor work that needs to be done? (i.e accept $50K counter but ask they fix a few windows and buy 2 new appliances?)

Anything helps, thanks!

@Marshall Leipprandt it looks to be a good deal at first glance. Well over 1% rent to purchase price. No deal is really too small if it cash flows. If your initial max was 48 I would stick to that.

I would counter at $48K, the worst he can say is no.  The $2,000 difference will most likely not cover new appliances and a few windows.  

When you say recently made an offer, how recent are we talking?  He or she is trying to sell, and you're trying to buy.  If no one else is trying to buy the property he's turning away a sale.  I would try to find out if any other offers were placed on the property and use that to your advantage during your negotiation.

If the major things (roof, hvac, plumbing, windows, etc) are updated and in good shape and you are pretty sure you can keep long term tenants then sounds like a decent deal. But if any of those are not, just one roof replacement or HVAC or electrical issue etc could eat almost the whole year of rent or just a tenant moving in and out can be extremely costly. Sometimes it can be hard for me for these cheaper properties to work but when they do they do. Good luck.

Ask them that is the most you can afford.

I do not like is the rural location with 2K residents. Hard to unload. Hard to find comps. But it may be OK to get started. 

If it has no deferred maintenance it should be turn key. In that case you do not need property manager. Rent can be deposited into your bank account or online. 

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How many renters are even available in a town of 2500? And who would you sell to if you want out? I’d worry more about the location than the xtra 2k

Seems like a decent way to start, keep in mind, it is good to figure CAPEX and Vacancy in your numbers just in case. but in reality, that is another $1260 you would be making if there are no vacancies and no repairs needed. I always figure those myself, to make sure the property will cash flow, but i usually do not touch the money until it gets to a certain reserve, usually 10K. then leave that in the account and each month after that the $1260 is profit. ( or $105 / month) so you would be bringing home $192/ month. the unfortunate part of my strategy for you, is it would take 4 years of saving to reach 10K but you may not need to save that much. Find out what it would cost to replace your roof or completely re do a bathroom, those would be your biggest expense in an emergency, then add 6 months of rent to that, that may be enough for you to keep in the account.

If your highest offer is $48k your highest offer is $48k. It's a business decision so keep it business. If the deal doesn't work for you at $50k, walk away.

@Trenton Miller I made the offer on Monday, 23 Oct. To my knowledge, there are no current active offers either. 

@Jon Johnson Roof is new as of 2012. Some of those other things I have as contingencies in my offer upon inspection. I would back out if after inspection, I found out the HVAC or plumbing needed more than $2K of work total. Thanks for the response!

@Sam Shueh Thanks for the reply! I do agree it may be hard to unload given its location. That's definitely one of the negatives on this deal.

@Anish Tolia Thanks for your response. It definitely is in a small town but it is within 45 minute drive of three much larger towns and a lot of people tend to rent/buy in the smaller town and commute because it is centrally located and has a much lower cost of living. I do agree though...it is a very small town. 

@Patrick Lisa Thanks Patrick! 

@Jason DiClemente Thanks for the reply! I know it is definitely a business decision. This first deals are tough...on the one hand, I feel like I've finally found one that pencils out after a year of looking but on the other hand I'm trying to have no emotional drive to purchase it.

Unless you drive a Tesla your cost of gas to go service this property is going to probably run you 25% of your net income not including wear and tear over the course of a year. .. I would pass on this UNLESS you have a way to get to 10 to 20 doors .. you simply don't have enough gross income to weather a major repair or vacancy.. One major issue and you could lose 1 to 5 years of your net income.. and then what .. why even buy this... ???  

seems to me I would be looking for an investment that has bigger gross income and in a better location even if the return was a bit smaller..

@Jay Hinrichs thanks for that! I value your experience and wisdom. I countered again at 18% below listing price. If they do not accept this, I’m walking away.

I think it could be a good first deal. I’ve been looking in my market for about a year and haven’t had much luck. I’m Active Duty military and will be moving in 2-3 years to a new location and while I always want to ensure I am making the best decision possible for myself and my family, I do not want to use my military service as an excuse for kicking the can getting started in rents properties.

Regardless of whether I get this property or not, I will constantly be in search of new deals!

Thanks again for your response and being a valued member of BP!

@Marshall Leipprandt - I think on this deal you will run higher than 50% on expenses. 

2 Kitchens, 2 sets of appliances, 2 HVACs... all for only $700 total rent. Capex and general repairs maintenance on cheap rentals end up being a HUGE percentage. The cost to replace and repair stuff doesn't change that much. That $4k HVAC (of which you have 2) - is still $4k wether the rent is $800 or $350.

Let's say that $4k HVAC has a 20 year life. 

$800/month x 20 Years = $192,000 gross rent. The HVAC is 2.08% of that.

$350/month x 20 years = $84,000 gross rent. That same HVAC is now 4.75%

Factor that for all capex and repairs/maintenance and your total expense factor will definitely be more than 50%. I don't think you'll make anything on this deal. 

Thanks all!! I appreciate everyone’s wisdom. The sellers declined my second offer, so this deal wasn’t meant to be 👍🏼

I learned a lot in the process though, so now I’ll keep searching and analyzing.

Originally posted by @Austin Fruechting :

@Marshall Leipprandt - I think on this deal you will run higher than 50% on expenses. 

2 Kitchens, 2 sets of appliances, 2 HVACs... all for only $700 total rent. Capex and general repairs maintenance on cheap rentals end up being a HUGE percentage. The cost to replace and repair stuff doesn't change that much. That $4k HVAC (of which you have 2) - is still $4k wether the rent is $800 or $350.

Let's say that $4k HVAC has a 20 year life. 

$800/month x 20 Years = $192,000 gross rent. The HVAC is 2.08% of that.

$350/month x 20 years = $84,000 gross rent. That same HVAC is now 4.75%

Factor that for all capex and repairs/maintenance and your total expense factor will definitely be more than 50%. I don't think you'll make anything on this deal. 

Low end duplexs'  look so good on paper.. but as you so acuratly described cost to maintain far exceed the numbers for a single unit. 

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