Hi! I'm a newbie to multi-unit investing. I'm looking to make an offer on a duplex in northern Va. According to the tax records, the land is valued at $260k and the building is valued at $1k. While the building needs some repairs, it appears to be worth than $1k. The owner is asking $270k purchase price, $1300/mo (includes 6% interest) payments, and is willing to owner finance for 3 years with 20% down. Both units are vacant as the owner hasn't done anything with the units for whatever reasons. Top unit is a one bedroom unit and is ready to rent. It could be rented for $700-850 a month. The lower unit needs work (about $12-15k) but can be converted to a 3-bedroom unit. It could be rented for $1100 a month. Can someone help me understand the land value vs property value? Would it make sense to make an offer?
This does not sound profitable.
Tax valuations can be grossly inaccurate and are a bad way to appraise a property. Even a good valuation is often slightly below market value. However, I've seen homes with tax assessments that were 20 - 50% below market value and some that were assessed higher than market value, in the same market at the same time! I just looked at a property a few days ago that was tax assessed at $25,000 but I know the land is worth $40,000 and the rental on it worth at least $50,000.
Learn to analyze value by looking at properties that recently sold. You should be able to find a few that have sold recently. Were they in similar condition? Did they need major repairs, minor repairs, or were they recently renovated? How much did they rent for?
Based on what you've shared, he's probably asking for market price even though one of the units needs work before it's rentable. Even after renovation, the income you're projecting isn't enough to justify the price. A lot of people use a 1% or 2% rule of thumb, meaning the rent income should equal 1 - 2% of the purchase price. 1% would be $2,700 a month income and you're projecting closer to .7% which is not a good deal.
You could also evaluate the property using the 50% rule and see that it's not producing enough income for you. If it rented for $1,900 combined, 50% would be $950 but your debt service is $1,300 a month. That leaves you $350 short to cover expenses.
I would pass. Take a little more time to educate yourself on a few things:
- Market analysis: you need to do more than look at tax records or a Zillow estimate, both of which are bad tools
- Analyze rentals: 50% rule, 1% rule, 2% rule, and BP calculators. These will all help you know if you are making a wise choice or not. Watch Brandon's videos where he analyzes actual deals and practice. Once you learn, it won't take long to analyze a property and it can save you a lot of heartache!
- Negotiation: Just because something looks good at $270,000 doesn't mean you should offer that. A property is only worth what you're willing to pay for it. A lot of money can be made with proper negotiation. Even if this property were worth offering on, I would still ask for a low/no down-payment or a reduction in price to cover the necessary renovations.
I hope you find something of use in here.
@Nathan G. - Thanks!!!! This is great feedback and extremely helpful.
I am nearly certain I have seen this unit. If it's the one i'm thinking of, it's all condemned. Good area though, zoning would allow a nice new construction up to 4 units.
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