Is this a deal?

24 Replies

I just came across this potential deal.

Duplex 2/1,2/1

1,800 sq ft

$88,500

11% cap rate is questionable

I do not have expenses, can I use 50% of gross rents just to see if it makes sense? $49/sq ft, land value per county assessor is $9,000. To calculate my cape rate I just did a real quick equation of gross rents divided by asking price. This is a learning exercise for me.

Here is the formulas I tried to use:

cap rate = NOI/asking price

replacement cost = $/sq ft + land value

Did I miss anything or just everything?

What are the estimated rents? I'd need that to figure out what the NOI is. Also, how much rehab is needed?

@Rodney Kuhl Gross rents is $990, $495 per unit. have not estimated rehab cost. both units are occupied. Do I need to estimate rehab cost now?

@Christopher Hunter Are you trying to wholesale this deal?

If gross rents are $990, the 50% rule says the monthly NOI is $495 (although from what I've heard, this is probably low for multifamily), and the NOI for the year would be $5,940. If I divide that by the purchase price of $88,500, I get a cap rate of 6.7%. So I'd say it's not a great deal. That doesn't even factor in any additional rehab costs upfront as well.

OK. No can you explain where I went wrong in my calculation? Yes I was going to wholesale this property just for the learning experience. A Realtor that I might be interested in this for a first time deal.

I'm not exactly sure what you did in your calculation. Did you just take the gross rent ($900/mo * 12 mo) and divide that by the asking price? That doesn't take into account the expenses the landlord will have (which is what the 50% rule accounts for).

@Christopher Hunter

From what I've picked up (and you can find this on other posts) cap rates for what are considered residential properties (4 units and less) is not as meaningful for an investor as for 5+ units. I think one of the reasons why is because they are considered residential, they tend to use comps to value them versus cap rate. But that's not the interesting question.

The interesting question here is, what could this property be worth to an investor? If you put the rehab in and are able to raise rent (if it is supported by the comps in the area), does that now make it more attractive? How is that area this property is located within trending? What's the potential here? Maybe there is some, maybe there's not.

Looks like a 6.7 CAP to me (hint: rental properties have expenses, a lot of them). I don't know where you came up with 11. If the owner is paying any utilities then your return will be even lower. Unless it's in an amazing neighborhood that someone wants to bet on appreciation in then I doubt any investors are going to jump on that return.

You can go ahead and pull comps in the area and get some repair estimates to see if it's a fix and flip candidate but I'm guessing not.

@Paul B. Now that now I will have a re-evaluate how I looked at this property. I do not know that about duplex, tri-plex, and 4-plex. I thought if it had multiple rents coming in then I would use cap rate and other dertermining factors.

@Rodney Kuhl Let me ask you this. this is an email I received. What do I need to be looking at in this email? Is there enough information here to analysis this property? Duplex

3117-3119 e Michigan st

lock box

$18k

2br-1b

881 sf

tax $1030 / yr

1900

Originally posted by @Rodney Kuhl :
@Christopher Hunter Are you trying to wholesale this deal?

If gross rents are $990, the 50% rule says the monthly NOI is $495 (although from what I've heard, this is probably low for multifamily), and the NOI for the year would be $5,940. If I divide that by the purchase price of $88,500, I get a cap rate of 6.7%. So I'd say it's not a great deal. That doesn't even factor in any additional rehab costs upfront as well.

How can you say it is not a great deal when you have NO idea how to calculate a cap rate and NO idea what the market cap rate is? 50% rule is helpful to get a rough estimate of CASH FLOW. You cannot calculate NOI using the 50% rule therefore you cannot calculate a cap rate.

@Paul B. That is a good question. I do not know that area of this property in Apple Valley , CA.

@Bob Bowling I agree. But using the 50% rule gives you a quick analysis to see whether the deal is even worth your time. If I were to calculate the cap rate as an estimate using the 50% rule as I did and I came up with 6.7%, I wouldn't bother exploring the deal further. Would you?

@Christopher Hunter You need to know the estimated monthly rent for sure. Also estimated rehab is needed. From there you can figure out a lot of the other expenses. But you'd also want to figure out what the actual insurance costs are, etc.

Originally posted by @Rodney Kuhl :
@Bob Bowling I agree. But using the 50% rule gives you a quick analysis to see whether the deal is even worth your time. If I were to calculate the cap rate as an estimate using the 50% rule as I did and I came up with 6.7%, I wouldn't bother exploring the deal further. Would you?

Hell yes if I knew the market was buying at a 3% cap! You just passed on a SCREAMING deal!

@Bob Bowling Great point! I never even thought of that. As you can probably tell, I'm knew to all of this. I was only thinking about what cap rates are in my Indianapolis market. Thanks for the quick education!

@Rodney Kuhl So if I have several leads sent to me and and need to do a quick check to see if I even need to look at the property further I need ARV, estimated repairs and my profit if this were a wholesale deal?

what you really need is comps. Anyone can pull an ARV out of thin air without justification. You personally need to start by studying what sells in the marketplace, for how much and how quickly. Forget about wholesaling altogether if it takes more than 3 months to market a property once it's fixed up (unless it's a high end market perhaps, but I definitely don't recommend a beginner start wholesaling in a high end market). You're flying blind right now because you have no understanding of values in the market. So stop everything and study comps, block by block if necessary, until you have enough understanding of value to know if cap rates are even a useful measuring stick in your market, then if so, what are they there?

You wouldn't consider wholesaling antiques, electronics, or any commodity without understanding values really well, would you? Real estate is no different.

That's why wholesaling is generally not a beginners game. If leads are being delivered to you without significant marketing on your part, chances are they're not wholesale deals. They might work for fix

Originally posted by @Christopher Hunter :
@Rodney Kuhl Let me ask you this. this is an email I received. What do I need to be looking at in this email? Is there enough information here to analysis this property? Duplex

3117-3119 e Michigan st

lock box

$18k

2br-1b

881 sf

tax $1030 / yr

1900

LOL - I owned the double next door a couple years ago. That's a $375-$400 per side area [and pretty rough as well]. I would plan on spending at least $3k-$4k per side once the tenants move out to get it back up to speed.

Do you have a property manager yet? If not, you need to get one FIRST and then start looking. You can use them as a good resource to tell you if it's a good area or not.

You will have some trouble finding a PM that will take this one on due to the area and low rent.

Personally, I tell my out of town clients to start with strong, post war, SFH in blue collar neighborhoods and go from there. The NOI on paper IS very tempting with these low cost properties but they almost never pan out [ask me how I know!]. High vacancy rates, vandalizim, tenants that don't respect anything, etc.

I had over 22 doors at one point - all similar to this one. After two years of heart ache, I was barely able to sell them and now only own nicer multi-units or SFH.

I hope that helps.

@Shawn Holsapple Yes thank you very much. I have been researching the Indianapolis market and looking at multifamily properties. Can you recommend some good resources I can pull some information from?

Other than the MLS, the usual sites like Realtor.com, Redfin, & Zillow to see what is listed work.

Our inventory is low and compitition is tough on everything right now. I would connect with a few "good" wholesalers that actually live here in the market [like myself].

You can also usally find deals from you property manager.

@Scott McMahan OK I hear what you are saying. Thank you. I had looked on Craigslist and saw another property and asked the valuable question "Do you have anything else not on the market yet" and he sent over a list of properties. I will begin understanding comps better. Thank you for the advice.

Originally posted by @Shawn Holsapple :
<snip>

Personally, I tell my out of town clients to start with strong, post war, SFH in blue collar neighborhoods and go from there. The NOI on paper IS very tempting with these low cost properties but they almost never pan out [ask me how I know!]. High vacancy rates, vandalizim, tenants that don't respect anything, etc.

I had over 22 doors at one point - all similar to this one. After two years of heart ache, I was barely able to sell them and now only own nicer multi-units or SFH.

I hope that helps.

+1 vote and some great advice. I went through similar -- started with downtown "Center township" duplexes. After years of headache sold them and moved into SFRs.

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