Is this a good deal?

7 Replies

Hey everyone, First post regarding a possible first purchase.  I am new to real estate investing and my wife and I have been looking for some rental properties in the Northern Middle Tennessee area.  We are currently under contract on a duplex in Clarksville TN.  I wanted to give some details to see what you guys think about this deal.  Our goal is to create a portfolio of rental units for retirement.

All feedback is welcomed, and please don't assume I know anything.

This duplex is currently occupied on both sides. They pay their own utilities. Each unit is a 600 sq ft 1 bed 1 bath, built in 1951, has cheap siding, 10 year old A/C unit, needs new water heaters, and some other repairs that I have estimated to be around $7k in total.  The biggest of repairs for a tree removal at $2k.  The rent for each unit is $450 with 1 unit on a month to month after 1 year lease was up this month.  The other unit is on a partial Sec 8 voucher,  with only $80 coming from the voucher and the rest being covered by the tenant.  This unit has been occupied with the same renters at the same rent rate for 4 years with their lease expiring in November of 18.  I have spoken with 2 management companies with an 8% management fee who report the rent is under market rent for the area and would plan to start the rent listing at $550 with expectations that it might have to be dropped to $525 to fill the units.  Only 1 unit is currently approved for Sec 8.  This duplex is in a very poor/rough neighborhood relative to this city.  I would see practically zero return on the property because this area is so rough/crime riddled. 

The listing price was $75k, and we are under contract at $71k. They have offered us a $3k repair allowance towards repairs, but will not complete any repairs. This is a cash offer on our end up front, but we would pull equity out to get it back into our other investments, ideally leaving about 40% equity in the duplex. So we would have about 60% on conventional loan probably within a year. In looking at HUD calculations, the fair market rent in the area for an efficiency is $560 and for a 1 bedroom it was $640 If I am remembering those numbers correctly. Our plan would be to raise the rent on the month to month renter to get it to market rent. If that renter were not able to stay we would take the risk of losing the tenant to get that unit approved for Sec 8 with a voucher tenant in place. We would then do the same to the other unit were tenants have been occupied for 4 years. We would raise to market rent and if we lost them, we would try to fill with a full vouchered tenant. If both properties are renting at $550 a month this cash flow sounds excellent. If I am only at $450 a month, is this property worth it from a cash flow only perspective? My concern is that we have planned to be conservative adding 1 rental currently. We probably won't add another for 18-24 months. Is this the one that I should pull the trigger on. Is it good enough to be my 1 deal for a bit?

@Logan T. this sounds like more of a headache than anything.  With the rental income this low, in a poor neighborhood, I don't think you want this to be your first rental experience.

The words rough/poor neighborhood and crime riddled are kind of red flags to me. But with that being said I don’t know that market specifically. Are there similar rentals near by you can base rates and ease of ownership off of? Will you have to worry about break ins? What kind of crime reports are in the neighborhood? Can you justify those headaches for the amount of cash flow you’d receive?

I would imagine the neighborhood is a large percentage of rentals.  The rental comparisons in the area are from 2 property management groups that have multiple units in the area.  I would be using a property management group to manage this unit because of the rough area.  The crime reports are things like petty theft, domestic disturbance type things.  The unit is 1 block from a large government housing sector if that tells you anything.

Is it feasible to ask the current management company for a report of completed/requested repairs from the tenants? Might give an idea of concerns with the unit. 

Updated about 1 year ago

Update: The current management group was able to give me a specific market rent evaluation based on 1 mile radius, which is what Sec 8 uses for comparable. Rent comparison returned $575 as the comparable for the area. They were also agreeable to send me a cash flow sheet and repair list from their records, so hopefully that gives some insight into how much of headache this place might be.

Eh that’s a pretty expensive property for that low rent and in that neighborhood. I am not sure if you would consider that C or D class and while I suspect you will cash flow with you financing set up that’s a lot of trouble for not a lot of cash flow. Depends really on whether you want to work to find the deal or accept a lower return for the easy pick up.

@Logan T. Granted different markets can be different but I own a C class rental that rents for 750-800 (single family) and with those rents being so low at 450 or 550 I don’t think that’s worth the headache.

My advice is to avoid buying this

Again, showing my newness.  If I am getting $575 per unit and I'll be spending about $76k for the duplex, what should my return be?  I had set my goal at a 10% capitalization rate.  Should it be higher on a unit that will be exclusively cash flow?

I am seeing about a 12% cap rate with taxes, 10% repair, 10% vacancy, and 8% management fee.

I have several rentals in the area.  I would run it through the rental calculator.  Make sure to include your city and county taxes when your running your numbers.  Seems a bit high for 2 units in the area.  But the market has risen over the past year.  If the numbers work, do it.

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