What do you guys think of this deal?

23 Replies

Hello All,

It's been a long while since I've been on the forums, but I have finally decided to get serious with purchasing a duplex this year. My apartment lease is up in August so I have set a goal to be in a duplex by then. The idea is that my wife and I move into a duplex and rent out the other side to live in a place for less and have an investment property. While we are living on the one side, we plan on fixing it up, and then eventually moving into the other side, and to do the same thing. Eventually after a year or two we'll move into another place and keep doing that till we have several properties. 

We are currently looking in Madison, WI,  and I have found an attractive property that I am thinking about making a offer on. The house is listed at $255K, and we are thinking about making an offer at $230K. One side is currently rented out to a long term tenant that is $850 on that side. The other side (the one that we would be living on) is $1300.

So when it's all said and done. The mortgage payment would be around $1600/month, but then we would be getting the $850 (maybe more if we can raise rents?). So that would knock it down $750/month. What do you guys think? Is this an ok first place to start with? 

I know I'm a little light in the detail area when it comes to numbers. So please let me know what else you would need to further assess.

Thanks so much!

So it looks like , if you pay $1,300 rent and the other side pays $850 you income is $2,150 a month.  How much are the taxes, the insurance, maintance, management, Landscaping.  How much will renovation cost?

Mortgage and Interest is $1,600 +Taxes +Insurance+maintance+landscaping+garbage and water +renovation =? per month

What are you paying in rent now?

Can't you move into the $850.00 side?  

bg  

So it looks like , if you pay $1,300 rent and the other side pays $850 you income is $2,150 a month.  How much are the taxes, the insurance, maintanence, management, Landscaping.  How much will renovation cost?

Mortgage and Interest is $1,600 +Taxes +Insurance+maintance+landscaping+garbage and water +renovation =? per month

What are you paying in rent now?

Can't you move into the $850.00 side?  

bg  

I agree with Barbara.  Gotta know the other info.  Are utilities included or separated? With taxes, insurance, water, trash etc... this property might be negative cash flow, however you need the other info to make an accurate analysis.

Also, whats the condition of the property?  Is it older (1900 built)?  Does it need renovation to get 1300?  You should include vacancy of at least 1 month, plus repairs, cap ex.  All of this needs to be included in your analysis.  

Well it's really in pretty good condition right now. It just needs some updates here and there, and we would do that over the first year or so. The long term tenant is in the 850 side currently, and because this is my first time I'd rather just let her live there another year before I move into the cheaper side. 

This will also give us time to make the updates to the kitchen and such. We would also play the roll as 'management'.  The place just had a new roof put on last year I believe. It could use some flowers and some outside 'sprucing' up. 

$1600 is with Taxes(5000/year) and insurance (1200/year).

Taxes do seem high, but the thing that is appealing about this place is that it is in a very nice neighborhood. I would be very comfortable finding good tenants in this area. This is also a long term investment that we plan on having for a long time :)

Originally posted by @Christian Bors :

I agree with Barbara.  Gotta know the other info.  Are utilities included or separated? With taxes, insurance, water, trash etc... this property might be negative cash flow, however you need the other info to make an accurate analysis.

Also, whats the condition of the property?  Is it older (1900 built)?  Does it need renovation to get 1300?  You should include vacancy of at least 1 month, plus repairs, cap ex.  All of this needs to be included in your analysis.  

 House is 40 years old. It also just had a new roof put on it. I haven't had any kind of inspection on it yet. So I'll have those deets for you soon enough :)

@Seth B.

Really bad investment property.  It is cash flow negative.

I'd pay $147k for this place.  That would get me to $250/month in cash flow AND 15% Cash on Cash return.

Here are the numbers as I see them:

Total Due at Signing $14,850

Mortgage Rate 4.25%

Length of Mortgage in years 30

Monthly Mortgage payment $1,080.55

Taxes $416.67

Sewer and Water $100.00

Trash $- (Does the city pick up trash as part of your taxes?)

Heat/Utilities $50.00

HOA/Legal $-

Cap Ex and Ops $150.00 (this covers everything from snow removal to roof replacement.  $150/month is a minimal amount you'll need to fix at least 1 roof, 2 water heaters and a furnace in the next 25 years)

Insurance $100.00

Mgmt Fee $215.00 (at some point you are going to want to either pay yourself or someone else to field 3am phone calls)

Vacancy $174.15 (1 vacancy/apartment/year)

Total Expenses $2,286.36

Unit 1 $1,300.00

Unit 2 $850.00

Total Revenue $2,150.00

Cashflow/month $(136.36)

Cash on Cash Return-11.02%

Run a 10 year history on the annual property taxes. What are they historically, where are they at today, and where are they going is key.

You could have rising property taxes at a faster clip than your annual rent increases. Same if you pay the utility on behalf of the tenant included in the rent. The water and sewer usage per unit rate could go up or you get hit with special assessments. All of these things and many other can bring your returns down to nothing.  

You are not even at 1% rent to sales price ratio. For that to even possibly work you need to be in an amazing area paying that kind of price per unit and look at rent growth history the last 5 years and get year by year average. If you have strong rent growth and appreciation it might work since you are living there.

Is 850 a month market rate for that unit or is this a legacy lease where rent has stayed flat forever?? If it has stayed flat you need to see what file this landlord has on the tenant. If they can afford to pay more rent income wise then you might want to increase the rental rate some. You want to get more out of them but not enough where it makes them move and you have thousands in expenses rehabbing to get rent ready again at market rates.

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

Ok here is the thing guys... when it comes to properties in Madison. The only ones that come kinda close to the metrics you are mentioning are in rougher parts of Madison. I'm really not in the mood for or having to deal with any bad tenants or just rough neighborhoods in general.  

I have been looking on and off for awhile at different properties, and nothing really comes much closer to the ideal metrics. Anything under 200K is in a not so good area. Everything here in Madison is pretty darn expensive unless I'm missing something?

I agree with @Aaron Montague - this is not a deal. At least not with the current numbers.  Plus, we don't know how much you are planning to put down, if you are less than 20% you're going to mortgage insurance as well. 

However - if this is a nice area, and the units are identical, the rent on the one side is way low. It's hard to know without knowing the area. I would spend some time on craigslist to find out what current market rents are. From what I found in a quick search, a 3 bed place in Madison could go for $800 or $2000 depending on location - you need to know. If market rents are $1300+ per side for this place it may be an ok deal after all, but I'd probably offer lower yet. If this is the one I think it is, the duplex next door sold for $320k last Oct, but it is bigger and much more updated. 

Originally posted by @Seth B. :

Hello All,

It's been a long while since I've been on the forums, but I have finally decided to get serious with purchasing a duplex this year. My apartment lease is up in August so I have set a goal to be in a duplex by then. The idea is that my wife and I move into a duplex and rent out the other side to live in a place for less and have an investment property. While we are living on the one side, we plan on fixing it up, and then eventually moving into the other side, and to do the same thing. Eventually after a year or two we'll move into another place and keep doing that till we have several properties. 

We are currently looking in Madison, WI,  and I have found an attractive property that I am thinking about making a offer on. The house is listed at $255K, and we are thinking about making an offer at $230K. One side is currently rented out to a long term tenant that is $850 on that side. The other side (the one that we would be living on) is $1300.

So when it's all said and done. The mortgage payment would be around $1600/month, but then we would be getting the $850 (maybe more if we can raise rents?). So that would knock it down $750/month. What do you guys think? Is this an ok first place to start with? 

I know I'm a little light in the detail area when it comes to numbers. So please let me know what else you would need to further assess.

Thanks so much!

 Seth, First off.....

If you are looking to make $$$$ you are paying wayyyy toooooo MUCH. You will make peanuts from this deal even if you do purchase it at 230k.  I really don't see cash flow after all your expenses are paid.

If you are seriously looking at a duplex try finding ones that are foreclosed or a short sale at huge discounts.

Or talk/network with real estate agents in your area telling them you are looking for people who are trying to sell their duplexes.

How do you figure your mortgage will be 1600? are you putting 70k down?

Originally posted by Account Closed:

 Seth, First off.....

If you are looking to make $$$$ you are paying wayyyy toooooo MUCH. You will make peanuts from this deal even if you do purchase it at 230k.  I really don't see cash flow after all your expenses are paid.

If you are seriously looking at a duplex try finding ones that are foreclosed or a short sale at huge discounts.

Or talk/network with real estate agents in your area telling them you are looking for people who are trying to sell their duplexes.

How do you figure your mortgage will be 1600? are you putting 70k down?

 No we were looking at putting 5% down, so something like 14K. I guess I'll just have to keep looking!

Originally posted by @Aaron Montague :

@Seth B.

Really bad investment property.  It is cash flow negative.

I'd pay $147k for this place.  That would get me to $250/month in cash flow AND 15% Cash on Cash return.

Here are the numbers as I see them:

Total Due at Signing $14,850

Mortgage Rate 4.25%

Length of Mortgage in years 30

Monthly Mortgage payment $1,080.55

Taxes $416.67

Sewer and Water $100.00

Trash $- (Does the city pick up trash as part of your taxes?)

Heat/Utilities $50.00

HOA/Legal $-

Cap Ex and Ops $150.00 (this covers everything from snow removal to roof replacement.  $150/month is a minimal amount you'll need to fix at least 1 roof, 2 water heaters and a furnace in the next 25 years)

Insurance $100.00

Mgmt Fee $215.00 (at some point you are going to want to either pay yourself or someone else to field 3am phone calls)

Vacancy $174.15 (1 vacancy/apartment/year)

Total Expenses $2,286.36

Unit 1 $1,300.00

Unit 2 $850.00

Total Revenue $2,150.00

Cashflow/month $(136.36)

Cash on Cash Return-11.02%

 Aaron you just did his homework.  Let the guy think on his own! hahahaha

Seth say thank you to this man. and take this piece of work as advice when you are looking for your next property to not fill up this forum with ridiculous deals.

C'mon man your smarter than that...

Originally posted by Account Closed:
he guy think on his own! hahahaha

Seth say thank you to this man. and take this piece of work as advice when you are looking for your next property to not fill up this forum with ridiculous deals.

C'mon man your smarter than that...

 Look "man" I understand the numbers aren't that great. What I do know is the areas around Madison. I thought there might be something to say for that and justify the higher pricing (guess not). I always figured this was a friendly environment for people to discuss deals. I wanted to do my due diligence and double check with a whole community as this is my FIRST deal. 

I do very much appreciate what everyone has said on this forum so far. Especially Aaron taking the time to run the numbers through his spreadsheet.  

@seth

I am just pulling your leg. I didn't realize it was your first deal. 

But yeah you should have a good understanding of what to look for. As far as the area around Madison I have no idea about it, but if there is some huge developments under way that could push the appreciation aspect up dramatically over the next 10 years or so then maybe if you don't mind losing money on it and living in it just to off set cost of living then go right ahead.

Originally posted by @Seth B. :
Originally posted by @Michael K.:
he guy think on his own! hahahaha

Seth say thank you to this man. and take this piece of work as advice when you are looking for your next property to not fill up this forum with ridiculous deals.

C'mon man your smarter than that...

 Look "man" I understand the numbers aren't that great. What I do know is the areas around Madison. I thought there might be something to say for that and justify the higher pricing (guess not). I always figured this was a friendly environment for people to discuss deals. I wanted to do my due diligence and double check with a whole community as this is my FIRST deal. 

I do very much appreciate what everyone has said on this forum so far. Especially Aaron taking the time to run the numbers through his spreadsheet.  

Don't count it out yet. It doesn't look good as is, but sometimes that's how you get a good deal - it might not be so obvious. I'm closing on a similar duplex that needs some work in Minneapolis for a bit under $200k on Fri and I expect it to cash-flow $800/mo after a light rehab.

If you can negotiate a price somewhere close to $200k, rent it for $1300/side and have the tenants paying all utilities, you'll be cash-flowing! Plus assuming you are paying some PMI in the beginning, you can get rid of that after a couple years that will make it even better.

Just make sure you run the numbers, and then run the numbers on 20 or so others just to practice and come back and look at it again. You can do all that from your couch in a couple hours. Good luck

@Seth B.

Don't get discouraged. I don't think these folks realize you're trying to make a home here..

That being said, I would look at two things. Is $750/month considerably less than what you would pay for something similar if you were a renter, not an owner? 

At $1600/month figuring no increases, you're going to be working off $350 a month. All crazy ratios etc. aside, that's very tight to be handling two units. 

I think you should look at this type of place as more of a "cheap" living as a resident landlord, rather than tons of cash flow. What type of neighborhood is it - is this 2 unit one of the only 2 units, or is it full of 2 units? 

[email protected] | 215‑490‑4851 | http://www.atanosmanagement.com | PA Agent # RS314542, NJ Agent # 1221341

All depends what your goals are. Had I asked about some properties I bought a few years ago the thread would have gone a lot like this one. A tad shy of the 1% rule but a good area in a solid high growth market. People telling me it's crap. Had I listened I'd be out 300K plus. Now that doesn't mean this will always turn out to be the case, it was a unique time in history, but still.

Depending on what you want this could be fine. Lets say you live in the unit for 3-5 years, gain some management experience, and move out and turn it over for professional management. Fast forward 15 years.

Madison is a solid growing market, this a is a good neighborhood so +/-4% appreciation a year on average seems very reasonable. Lets say you've raised rents the same amount. The place is now worth something like 375K. Your rents are probably like 3700 a month (I'm doing very rough top of the head ballpark math) but your mortgage payment (at least the principle and interest) is the same. 

15 years in you owe about 115K on the place (assuming you put 20% down) so you have about 260K in equity.

Lets assume you never saw a red cent of cash flow despite the fact that your mortgage payment stayed the same while your rents increased. You're still sitting on a quarter million dollars off of a +/-50K initial investment. Find me an investment that will get you a 5x return in 15 years. This is the power of real estate investing.

Of course, you have also enjoyed the tax benefits of depreciation and learned the business a long the way. Your purchase has given you experience and credibility with lenders and others and propelled you into other investments. Your second deal was better than the first. The third better still.       

If you're looking to live off REI in the immediate future this is probably not the best way to tie up 50K. But if you have 50K, a good job, will have another in a few years, and want to do something like this 4-5 times on your way to retirement you're likely to do very, very well.

I think there is a little bit of a disconnect on this site amongst the average investor out there and the full-time cash-flow only people who are, naturally, the ones who make up the bulk of the posters.

Originally posted by @George Nikolakakos :

All depends what your goals are. Had I asked about some properties I bought a few years ago the thread would have gone a lot like this one. A tad shy of the 1% rule but a good area in a solid high growth market. People telling me it's crap. Had I listened I'd be out 300K plus. Now that doesn't mean this will always turn out to be the case, it was a unique time in history, but still.

Depending on what you want this could be fine. Lets say you live in the unit for 3-5 years, gain some management experience, and move out and turn it over for professional management. Fast forward 15 years.

Madison is a solid growing market, this a is a good neighborhood so +/-4% appreciation a year on average seems very reasonable. Lets say you've raised rents the same amount. The place is now worth something like 375K. Your rents are probably like 3700 a month (I'm doing very rough top of the head ballpark math) but your mortgage payment (at least the principle and interest) is the same. 

15 years in you owe about 115K on the place (assuming you put 20% down) so you have about 260K in equity.

Lets assume you never saw a red cent of cash flow despite the fact that your mortgage payment stayed the same while your rents increased. You're still sitting on a quarter million dollars off of a +/-50K initial investment. Find me an investment that will get you a 5x return in 15 years. This is the power of real estate investing.

Of course, you have also enjoyed the tax benefits of depreciation and learned the business a long the way. Your purchase has given you experience and credibility with lenders and others and propelled you into other investments. Your second deal was better than the first. The third better still.       

If you're looking to live off REI in the immediate future this is probably not the best way to tie up 50K. But if you have 50K, a good job, will have another in a few years, and want to do something like this 4-5 times on your way to retirement you're likely to do very, very well.

I think there is a little bit of a disconnect on this site amongst the average investor out there and the full-time cash-flow only people who are, naturally, the ones who make up the bulk of the posters.

 Thanks George, yes that is exactly what I was thinking. I guess we'll just see how it goes, but thanks for the support!

@Seth B.

Now this is a very different scenario if you can actually get $1300/side.  Long term tenants are nice, but not if they are paying 35% under market value.

Looking at this as a house hack with the other side paying $1300 per month makes more sense.  I don't know what your rent is now, but I bet it is more than $300 plus utilities.  This deal gets better with $2600 in total income.

I don't bank on appreciation, but that doesn't mean you can't.  If the place gains value steadily, great.  If it doesn't, bummer.  If you aren't counting on it, you don't worry if it moves either way.  I strongly believe you should look at Buy and Hold deals for the day after closing, not 10 years down the road.

I'm ok with deal as I know Madison and its a solid town with a great University.   

I would go for it especially since it's owner occupied.  

You can't always hit a home run but you need your first deal to get in the game. 

Best of luck!!

I just bought my first house in Madison and have also been considering buying a place to rent. My real estate agent had mentioned that it was a good time to buy because everyone is trying to rent so the rent prices are so high and the house prices are low. There is one company that pretty much dominates the area and the young employees have a lot of money, but aren't ready to buy a house (or don't think they'll stay for that long), so renting is an attractive option. I've paid between 1000 and 1300/month for renting the past three years here (1 bedroom apartment), and I think most of my colleagues pay around the same amount. It's also pretty easy to find reliable renters here.

@Aaron Montague

4% is barely appreciation, it's more like a little above the historic inflation rate. You don't even need appreciation. Inflation alone will eat away your debt. Even in a no appreciation/inflation scenario the simple amortization and tax benefits make it a not so shabby deal. Assuming the house is worth still worth 235K in 15 years he still only owes 115K on it so that's 120K in equity for a 15 year 50K investment. +/-6% ROI. Better than most investments out there these days. And you'd be accomplishing that in what would almost certainly be a historically low inflation environment. Not too shabby for an almost worst case scenario.

I agree to a point though. Guys banking on 10, 15, 20% appreciation in markets where housing is already pricey is quite a gamble. But I think investing in strong up and coming currently affordable markets is a great play. Even if they only get to a fraction of the cost of living of the more expensive places there is room for tremendous appreciation.

There seem to be more scenarios with additional upside than downside. A run up in inflation 7, 9% inflation comes back. Your debt becomes worthless while your rents soar. But in general the most likely scenario seems to be in line with what has happened historically. Appreciation marginally above the inflation rate and inflation in the low single digits.

Problem with focusing only on returns upon closing is that it will likely steer you to low appreciation, weaker markets. I think there's a middle ground where you aim for markets that will be the next Denver, Austin, Portland etc. You probably won't be nailing 10 cap deals but you can find decent caps with solid. long-term growth prospects 

So again, someone who is cash/income strong, doesn't need the cash flow today, and isn't interested in full time REI, can do really well with deals just like these.

Personally I go both ways. I bought places that have light cash flow but are newer and in a great market. Also picked up a mobile home park/low income apartments for cash flow.

@John Weidner totally agree on the point of getting into the game. Better to hit a single and get started than to watch on the sidelines waiting for the perfect moment that may never come. I started as an accidental landlord with a not so hot SF on my hands. That's what opened the door to the next deal, and then another etc.