Duplex deal?

8 Replies

Asking price of remodeled duplex: $159,900.  I'm assuming we can get the property for around $150,000 (been on the market over a month).   It is a 2 bed/2 bath unit (x2) on quiet dead-end street with attached garage on each side and large lawn.  Can I get some input on our numbers?

P&I = $814/month

Taxes = $280/month

Insurance = $100/month

Total expenses = $1,194/month

Projected rental income of $800 per unit = $1,600 total per month (all utilities paid by tenants)

Projected profit of $406 per month (minus any repairs).  We will be managing this duplex ourselves to save that expense and gain some experience.  Even with $200 per month in maintenance (which I doubt, it has been completely renovated), we're over the $100 per door threshold.  

Issue I'm having is that it is currently owner-occupied so no rental history.  We have excellent credit and down payment but it's obviously a risk buying without current tenants and I am wondering if we'll run into trouble with getting the loan because of this.


@Maggie Gasner

 Are you doing a 15-year loan?  Otherwise your PI looks too high with rates today.  I like doing 30yrs and paying extra if needed, but gives the extra flexibility.  The slightly higher rate is justifiable to me in exchange for the extra flexibility.

As far as qualifying for a loan, on investment property you can go up to 50% Debt-to-income ratio on these properties. If they were leased you'd be in a better position, because you'd be able to get income credit for 75% of the value of the lease. You mentioned it is owner-occupied, but does that mean both sides? If your gross income is high enough to add your PITI payment and still be under 50% DTI without tenants, you're in good shape on that end.

Don't forget to allow for vacancies and non-recurring maintenance/repairs!

Since you aren't going owner occupied, plan on at least 20% down payment.

Just doing a quick review, I would look at the numbers again.  If it gross rents are $1600, apply the 50% rule, that gives you $800 to pay the mortgage with.  Your mortgage P&I is $814, you are negative $14/month.

The 50% rule isn't hard and fast and it does vary by property type & area.  In my area I generally end up at 45%, but I usually estimate at 52% when I am doing a quick analysis.

Other individual items to consider is lawn, pest, CAPEX (Capital items like roof, AC etc) maintenance. Don't discount management either. You will gain a lot of experience managing your self, however, if your situation changes and you need to place the property under management you want to make sure that it will still cash flow. Also, don't forget about vacancy, generally 8-10%. Will you also be paying any of the utilities in the building? I have to pay water on my 4-plex's since that's what the market demands.

Hope this helps.  Best of luck.

And I'd strongly recommend getting pre-approved as well.  Will save you tremendous stress and legwork once you're in escrow.

And re-reading your post, I'd say the numbers don't make this a GREAT deal, but if it's totally renovated you'll likely have minimal costs the first two years. I'd rate it average, but I'm not familiar with your area.

Good luck!

Good point @Marco G. I always like to have my financing in order before I make an offer.  Knowing how things will work out with the bank puts me in a much stronger position when I am dealing with a seller.  I'm not trying to jerk them around, just like to be in the strongest position possible.

In fact, waiting back on an answer from the bank now about picking up 3 more quad's & a duplex in one deal.  Numbers are good, but don't want to have offer's dangling out there until I am in a position that I need to be to get the deal that I want.

Thanks for the feedback! The P&I is assuming 30 year fixed at 5% and I also factored in part of the down payment that we are utilizing a HELOC for. Both sides are in fact occupied by owner- from what my agent tells me, it's a parent/child situation and no (or minimum) rent is charged.

At a purchase price of $150,000 and 30% down, assuming 3% rent growth per year, 5% vacancy, 5% credit loss, and your total opex at 50% on a 30 year loan at 5%, factoring in your taxes and P&I, you will have positive NOI, but you won't be able to afford your debt payments.

Unless I am calculating this wrong: 

$1,600*.5 = $800 effective gross revenue. 

800 - 280-100=$420. 

Debt service is above 500 per month. 

Someone please let me know where / if I went wrong. 

You can better than 5% if you have 25% down. I am (hopefully) closing mid-June at 4.375. If you're shopping lenders you should be able to get 4.5% for only 3rd party costs right now.

@Maggie Gasner

With owner's family occupying both sides, make sure it is vacant at closing.

This doesn't like much of a deal, even at $150,000.  I'd pay $81k to get 15% Cash on Cash return AND $125/door/month cashflow ($312 total).

I'm not sure where you got a P&I (principal and interest) of $814/month. Even at 0% down, the payment at 5% is only about $804 :) I know you mentioned something about a HELOC, so how does that math look?

I would fully expect to put 25% down on this deal.

I looked at the numbers you gave, then made up a few others of my own.  I see a slight positive cash flow.  This is how I view your deal:

Monthly Mortgage payment $603.92 (25% down, 5%, 30yr on 150k purchase)

Taxes $280.00

Sewer and Water $66.67 (I spend about $400/year per apartment)

Trash $75.00 ( 2 yard dumpster emptied every 2 weeks)

Heat/Utilities $- (no common electric, basement or otherwise?)

HOA $-

Cap Ex and Ops $150.00 (it is vital that you save this away for the rainy day when your roof no longer stops the rain.  this will also be used for new water heaters, HVAC etc.)

Insurance $100.00

Mgmt Fee $160.00 (10% is pretty standard.  pay yourself this even if you are self managing) 

Vacancy $129.60 (8.1% represent 1 vacant month/unit/year)

Total Expenses $1,565.19

Total Revenue $1,600.00

Cashflow/month $34.81

Cashflow/year $417.71

Cash on Cash Return 1.01%