Good First Deal? Please help Analyze

12 Replies

Duluth MN 1,400 square foot. 2 bedroom, 2 bath (although 1 of the bathrooms is in the basement and very gross) Renter has been there 13 years. The trulia estimate for the property is $116,000 but:

A: Property is pretty run down appearance wise, good bones though. Rewired 2 years ago, roof 6 years old, water heater and furance less than 3 years old. We are getting this before it hits the market as we know the seller who was double homesteading and has to sell the property due to that, she just wants to get rid of it ASAP. She initially said 70k and we said nothing over 50k and that's where we've settled until we see an appraisal. 

B: I'm not huge on trusting that estimate. We are just in the beginning stages of getting the purchase agreement drawn up by an attorney.

It also comes with a 2 door garage (filled with junk and broken windows). The nice thing is it is technically 3 lots. The one the house is on and the garage is across the ally with an additional empty lot behind it. (could possibly take down garage and sell the whole 2 lots together as well)

Anything I'm missing? This is more of an appreciation purchase than a cash flow one (I mean three lots with a house and a solid renter for $50,000 in a good neighborhood seems no brainer.)I was conservative with the numbers, not using a realtor on our side and I calculated property management in there but we won't be doing that either. Any extra tips for a first timer who's been lurking on the forums for a year or so?

Double checked and it's showing correctly. Perhaps it's the taxes? They are pretty high for the size of the property, but I believe you can get do an appeal. The heat is also included under water&sewer and the windows are not great, so I'm assuming that's why that bill is high. That's our first capital expenditure we are investing in so that should help with the utilities. 

@Justin Teal this looks like a decent deal depending on condition. On a single family its not uncommon to have your tenants pay their own utilities so that could be throwing off your cashflow estimate! 

If you have the opportunity to do something with the lots to separate and sell for more that could present another opportunity.

I'm in the process of picking up a single family for $65K in Duluth, 3 bed 1 ba that should rent for $1100-1200 with tenants paying utilities. Subtract mortgage (~$ 550 w/ tax and insurance lumped into mortgage payment) and I'll pay trash ($40) and it should cash flow roughly $600-700/ month with a couple grand ~$3K, needed to get it into nice rental shape!

If you have anymore questions feel free to PM me or we could grab a coffee if your around Duluth!   

It READS like a deal, but a few questions:

A 1-bedroom with a 2nd bedroom in the basement?  That's kinda tough if the existing tenant bails, no?

If this is a 1-family house, why is the owner paying electric and heat?  Water and sewer?  Garbage?  (If any of these are a lienable item, then the owner pays and back-charges tenant, otherwise, the utilities should go into tenant's name.)

How much are the other lots worth?  What is price/sq ft in that location to build, and is it zoned for a house on the lots?

@Sam Torvinen

Thank you so much I appreciate that! That's quite a good deal you've got going. We've tossed around the idea of having them pay utilities I'll play around with some numbers and see what we could work out. 

@Marc Winter

It's a 2 bed 2 bath. 2 bedrooms on the second floor, with the main bathroom and just an oddly placed bathroom in the basement with the water heater and such. 

I haven't had the appraisal yet, but I did not think to ask about if it's zoned for houses! Thank you for that tip! 

Also the current tenant is paying all the utilities, I just asked what they were paying for calculating what we could rent it for, I was thinking about a $1,000 would be fair just based on other rentals in the area. It won't cashflow like crazy, but given I won't be using management and I don't actually expect maintenance costs to be that high I think it should do fair? 

Numbers look really favorable based on your calculations!  Well done!  Subdividing  sounds like a nice idea as well.  If all lots are taxed under one parcel, keep in mind that you'll need to go through a minor subdivision application with City planning but the process can be handled without an attorney.

If you need a good recommendation for a kickbutt real estate attorney, please feel free to shoot me over a DM. Prior to bring an agent I worked in legal for a number of years and supported a few local transactional attorneys. We frequently helped clients facilitate real estate transfers (some intra family, but most were arms length).

On the cover it sounded like a good deal but then looking at your numbers not so much...  Couple things to consider:

1.  Looking back Duluth hasn't seen much appreciation.  This is based on me looking at 30+ properties.  If you look at the properties listed for sale now I would bet the owner probably purchased it 10-15 years ago and they are selling for around the same price they purchased it for.

2.  Cash flow - with your reserves you are only projecting $27 per month or $324 per year....  I don't know how good your reserves are but having to replace the windows would wipe out years of profit...  One turnover will put you in the hole...

3.  Most of the housing stock up there is very old...  I wouldn't recommend shooting from the hip when looking at CAPX, I would look at the building systems and try to run a calculation for them.

4.  I am guessing this is on the west side of Duluth?  I would talk to property management companies and make sure you are not in one of the rougher areas.  That would increase turnover costs.

@John Woodrich makes some very valid points.  When you mentioned getting a property with good bones at 20k below asking with 1400 sf of living space plus a 2 stall garage all in a nice neighborhood, the deal sounded VERY attractive.  Unfortunately, after looking at the snapshot you attached I am inclined to agree that the numbers are concerning.  Ideally, you want to aim for a purchase price that allows you to cash flow at least $200 - $300/mo after expenses.  Also, I think your closing cost estimate is a bit low.  Check with your lender, but they typically start at 2.5% of your loan amount.

As far as appreciations, I wouldn't put all my eggs in this basket but I would encourage you to look at 12 - 36 month appreciation cycles for the area.  If you don't have access to this data, shoot me a DM and I can pull some numbers for you! @Justin Teal

Hey Justin, 

I agree that as a single family rental, you really shouldn't need to pay utilities as the landlord. With that cost eliminated, you're closer to $266 a month in cashflow. The other thing I noticed is that your ARV should be higher than $60,000. I don't know what neighborhood you're buying in, that makes a huge difference there. Lincoln Park versus Congdon or Central Hillside versus Hunters Park are VERY different price points for both home value and rents.

As far as buying a deal for appreciation in Duluth, like John said, I don't think it's a good idea. Properties really haven't appreciated much compared to other markets. A lot of that has to do with the limited businesses and industries available in Duluth. I do think that buying a place at this price point, with a solid plan on what you want to do with the extra lots, could make sense. But you gotta have that plan in place and figure out what you can sell the lots for. You might not be able to get much more than 20 or 30K for an empty lot, depending on what neighborhood you're in. 

All in all, I wouldn't say no way to this deal, but if it were me, I'd probably keep looking.