Is this duplex a good deal? New investor here.
Denver, CO · Member since 2020 · 15 posts · 0 votes
I am a new investor and looking for insights into this investment deal from others. I am also new to duplexes, but trying to house hack etc and then turn it around as a potential investment property on both sides. Good deal, great deal, bad deal? If it's a good/great deal would it be worth negotiating or just get it at the sale price?
Sale price: $379K
2 Units
Each unit is 3 bedrooms, 2.5 baths, 1 car garage
Very minor upgrades needed right now besides repairs (yard, fencing, window coverings, carpet, paint)
Unit A: rent $1400 (10 month lease)
Unit B: rent $1000 (month to month) - Unit B is the one I'd like to send a 30 day to vacate to move in and fix it up and then rent out 2 of the rooms. So potential rent could be $1200-1300.
I would do a conventional at 15% down.
Hey Maggie, so the numbers you provided can only tell part of the picture of the deal and as such anyone can only give a partial answer (without making some larger assumptions). With the initial information you've provided here's my train of thought.
Initial Glance:
- Does it pass the 1% Rule? At a sales price of $349k, and gross combined rent being $2400 (possibly $2700 after rehab) I would say it does not meet the 1% rule. But this rule's primary purpose is help weed out instantly poor deals or highlight deals that should have a further analysis done - so this property hasn't necessarily struck out yet.
- Without knowing anything about the location, I'd wonder if the $1,400 rent is at current market rent values as well (obviously if the two units are very similar, the $1,000 has got to be raised if possible).
Questions to answer to help give a better idea of the deal:
1) Once the monthly tenant is out and the rehab is done, what is the ARV of the property?
2) Do rents match current market rent rates?
3) What is the rehab cost? Sure it's minor, but money is money and needs to be accounted for.
4) Does the location of the property desirable for the caliber of tenants I am looking for? - Poor tenants / tenant selection can cause huge headaches and expenses, especially if their ability to pay rent is not solid.
5) One question I think a lot of people fail to ask themselves is "What is the opportunity cost of this?". Meaning, if I place my money into this deal, will I be unable to pursue another deal that could potential yield a better return on investment? In most cases, there will always be a "better deal" out there, but then the question comes down to how likely are you to find that better deal?
There's a lot more questions that you can ask/answer to help get a fuller picture but you're getting your feet wet by analyzing the deal and asking questions, so keep digging for answers and good luck!
Hey Maggie, so the numbers you provided can only tell part of the picture of the deal and as such anyone can only give a partial answer (without making some larger assumptions). With the initial information you've provided here's my train of thought.
Initial Glance:
- Does it pass the 1% Rule? At a sales price of $349k, and gross combined rent being $2400 (possibly $2700 after rehab) I would say it does not meet the 1% rule. But this rule's primary purpose is help weed out instantly poor deals or highlight deals that should have a further analysis done - so this property hasn't necessarily struck out yet.
- Without knowing anything about the location, I'd wonder if the $1,400 rent is at current market rent values as well (obviously if the two units are very similar, the $1,000 has got to be raised if possible).
Questions to answer to help give a better idea of the deal:
1) Once the monthly tenant is out and the rehab is done, what is the ARV of the property?
2) Do rents match current market rent rates?
3) What is the rehab cost? Sure it's minor, but money is money and needs to be accounted for.
4) Does the location of the property desirable for the caliber of tenants I am looking for? - Poor tenants / tenant selection can cause huge headaches and expenses, especially if their ability to pay rent is not solid.
5) One question I think a lot of people fail to ask themselves is "What is the opportunity cost of this?". Meaning, if I place my money into this deal, will I be unable to pursue another deal that could potential yield a better return on investment? In most cases, there will always be a "better deal" out there, but then the question comes down to how likely are you to find that better deal?
There's a lot more questions that you can ask/answer to help get a fuller picture but you're getting your feet wet by analyzing the deal and asking questions, so keep digging for answers and good luck!
Hey @Maggie Thompson! As I was reading your post I was thinking of my response, but then I saw @Sean Rosenbaum's post and he hit the nail on the head. I was going to say/ask the same stuff!
Looking forward to reading the answers to Sean's questions.
You need to run a cash flow analysis on the property. You can't decide with the information provided. PITI, maintenance and vacancy must be estimated and compared to the income. At first glance I don't think this is a great deal but I could be wrong.
Thank you all for taking the time to respond and provide help.
- Location is Redmond, OR and market rents seem about the $1400. Probably could raise it to $1500-1600 since it's a 3 bed compared to a 2 bed in same neighborhood for rent.
Answers to Sean's questions:
1) I don't expect the ARV to change from the sale price, that is my assumption I am going off of
2) Current market rents could potentially be higher, but assuming I match the $1400 on both sides just until the lease is up
3) Rehab costs I'm estimating about $5k with no change to ARV. One unit at $1400 has new carpet and paint a few months ago, so mostly just the second unit since they have been there for years and would need rehab.
4) Neighborhood is full of duplexes and a mix of folks, so some risk there in terms of having a potential bad tenant.
5) I have not seen any other duplexes on the market near this area under $400K so it seems like a good deal for the shape that it is in compared to bordering towns Sisters and Bend which are higher cost and in poorer shape.
@Maggie Thompson I am pretty sure I found the place on Zillow. It looks like everything has been selling in the mid-3's (granted several years ago). But being a house-hack, you can look at this slightly differently, since you will need to run numbers on what this property will cash flow compared to what you are currently paying in rent.
However, you should still be able to make money on it, if you were to move out.
In general, it appears your all in costs will be somewhere around $1,800 per month for PITI. Add another $280 per month in reserves and you are making a few hundred/mo. But you will also have vacancy 3-5%, if you want to have someone else manage it, that will be 10%, and leasing could be another 5-8% of your gross. When you add all those up, you are cash flow negative with both units rented.
I would personally pass, but where I am is not the same as someone looking to get their first property. If you outright buy a house in Bend and rent rooms, you will likely be spending more per month.
@Evan Polaski Thanks for the quick response! I would be managing the property myself and this will be my second property that I manage. When I run the numbers on the Bigger Pockets calculator for rental property it comes up as a thumbs up, but when I use my other calc it varies quite a bit, so was looking for others feedback in case I missed something. Everything around here is really high for rent and home prices.
Hey @Maggie Thompson, thanks for answering those questions. In short, I agree with @Evan Polaski in the sense that I don't think this property is necessarily a golden egg. I threw some numbers in a mortgage calculator to just get a sense of how much the gross rental income potential is vs the PITI and here is what I came up with. https://www.mortgagecalculator...
I grabbed the taxes and insurance off of what I assume is the Zillow listing based on what you described. From my perspective, if you're putting down 15%, and the sale price of the property is $379k, the PITI payment would be ~$2,390 and the best case scenario for gross rental income potential is ~$2,800 from what you described. That leaves you with just over $400 for all other expenses, including any utilities, repairs / maintenance, CapEx, vacancy, rainy day fund, etc... For that price point, I don't think it's a solid property.... at $379k.
But the good news is that $379k doesn't have to be YOUR price. Every property has a price that makes it work for you. Maybe the seller doesn't let the property go for the number that works for you, and in that case, it just means the property is not necessarily for you at this stage in your real estate journey. Work with the calculators (both BP's and the mortgage calc) to figure out a sales price that would work for you. Does $350k work? How about $325k? Obviously the lower your number is the less likely the seller will be to meet that number, but that's why the world has negotiations. Good luck digging into the sales price and seeing what number works for you!
Per my lender, the PITI payment would be $1900 with potential rent income of $2800.
Per my lender, the PITI payment would be $1900 with potential rent income of $2800.
If that's the case, then I'd say you have the majority of information you need to make a decision. With potential rental income of $2,800 that leaves you with $900 for expenses and cash flow. Double check your expenses to make sure they fall within the $900 after PITI and make your decision from there. You mentioned the plan right now is to self-manage the property. Have you thought about down the road if you no longer want to / can manage the property? Have you analyzed the deal if you needed a PM? Do the numbers still make sense? Analyzing a deal is never just a one-scenario analysis. An analysis should be done for multiple different possibilities / situations to make sure the deal is as robust as possible.
Hi Maggie,
Bend is a great place to live but like my home state of California , it’s not very landlord friendly. I’m sure you have done your due diligence on the existing tenant but I would validate current status of rent payments (you want to know if tenant impacted by COVID 19) Otherwise, I think the comments made earlier are spot on . You might want to obtain an insurance quote so your not surprised by unexpected costs.Rates have spiked up dramatically in recent months. Best of luck.
Yup I own property in the area and look at these everyday. I like the property you are referring to. I had made an income and expense report for myself. I think it is one of the better deals I have seen in a while. The concerns would be will prices fall further and the neighborhood is a little suspect, but I think you will be in a good position with that property and you can hold it for a long time through any potential downturn etc. I am going to send you a message with the spreadsheet I made.
Thank you everyone for your responses and advice! Extremely helpful!
@Eric Bilderback The neighborhood is not ideal and a bit hesitant when it comes to that. It seems like the price point for what I would need it to work would have to be $350K which seems low, but probably not if housing prices fall. That would be great if you could send me your spreadsheet!
100% concur with what you said. However it is one of the top 3 deals I have seen on the Central Oregon MLS this year I would say. What makes more nervous to buy it is what if prices go lower and I have money tied up in that deal and will have wished I would have held off for a bit longer. I will talk to you privately but I have just started to see what I would call a possible break in the pricing at least in 2 instances and it will be interesting to see if these decently priced properties go quick or if the market goes down further.