Good deal on a duplex?

Question

Buying my first rental investment! I just went under contract for a duplex, it’s a 4/2 on each side with a 2 car garage on each side. Paid asking which was a little lower than comps (about 15-20k) but it was a for sale by owner. Mortgage + fees/taxes = 1600

Rented out right now through 7/22 at 1150 for each side. My realtor says after the lease they will rent easily for 1400-1500 for each side. I personally think we did well but I was wondering what you guys as the experts think? Any advise or opinions appreciated.

Caroline Gerardo · Answer

Get bank statements from seller to prove tenants are paying. Inspect everything carefully

Mark Edler · Answer

@Miguel Rodriguez congrats on the first rental!

Good points by @Erik W. Two common metrics to evaluate long term rentals are the cap rate formula (capitalization rate) and cash on cash returns.

Stated in math terms:

Cap Rate = Net Operating Income / Total Property Cost

Cash on Cash return = Net Cash Flow / Cash Invested

Based on Eriks numbers and your cost mentioned, you're looking at a 5.5% cap rate and a cash on cash return of 11.2% per year.

Keep in mind that Cash on Cash figures are risky to rely on because of the potential for changes in the cost of leverage later in the life of the investment.

My favorite way to think of annual rates of return in real estate is to take the cap rate + appreciation rate (stay conservative here) - cost of leverage.

For example, a property with a cap rate of 10% with 5% annual appreciation and a mortgage with 3% will essentially yield 12% over the long term.

*Net Operating Income = Rents less standard operating expenses. This includes taxes and insurance but excludes interest and principal payments!*

Erik W. · Answer

@Miguel Rodriguez, okay, so I guestimated your mortgage P&I accurately at $1,100....  guess I've been doing this awhile.

So you're making about $280 per month ($3,360 annually) on $30K invested, which is about a 11.2% cash on cash return.  Better than some investments like CDs, bonds, and annities, but about average compared to the long-term average of a stock market index fund like the S&P 500, which has averaged 10.7% since its inception in the early 1970s.

Stocks are quiet and peaceful if you ignore them and the media hysteria.  They go up and down but average out at 10.7% over the long haul.

On the contrary, rental are time consuming and a hassle (unless you hire professional management that is very good) and if you ignore them you end up with 5 pit bulls and an ex-convict boyfriend who moved in and tears the place up.

Is the "spread" of an extra 0.5%, plus loan amortization (loan balance pay down), plus potential appreciation of the property value, plus possible tax advantages from depreciation worth it to you to be a rental property owner and all the headaches that come with it?  Answer that question for yourself to your own satisfaction, and you'll know if this is a good deal or not.  I can't answer it for you, nor can anyone else.

Good luck!

Jeffrey Donis · Answer

Like Caroline mentioned- you want to make sure you get bank statements to prove that the money is really there. Unfortunately, it isn't always there.

Caroline Gerardo · Answer

What records did they provide? A schedule isn't enough, easy to make it appear a tenant who during covid cannot be evicted

Caroline Gerardo · Answer

Get bank statements from seller to prove tenants are paying. Inspect everything carefully

Miguel Rodriguez · Answer

Hi @Caroline Gerardo

Thanks for the advice, we did ask for records and both tenants have been there for over 2 years with no missed or late payments.

Miguel Rodriguez · Answer

Hello @Erik W.

Thanks for the assist and all the great info. We paid 300k with 10% down. Mortgage before taxes 1100.

Erik W. · Answer

Hi @Miguel Rodriguez, and welcome to BP!

If I've got your numbers correct, total rents today are $2,300, and in mid-2022 they should increase to a minimum of $2,800.

The rule of thumb is to take out 35-45% of gross potential income for operating expenses which include taxes, insurance, maintenance, managements and capital expense reserves.  Even if you are a DIYer and plan to manage and/or do maintenance, you should still pay yourself for those jobs or you're not an investor, just an unpaid volunteer.

Let's say 40%, which leaves you $1,380 Net Operating Income (NOI).  I don't know what your mortgage payment is since you may have included taxes and insurance in that, but let's say it's $1,100.  This means you will profit (cash in your pocket) $280 per month after EVERYTHING is paid for.

How much money do you have in the deal?  How much is the purchase price?  Until we know those things, we can't evaluate the deal.

One way to measure is return on investment (your funds only).  Let's say you put in $10,000 as a down payment.  $280 / month profit ($3,360) on $10,000 invested is 33% return, which is pretty darn good!  If you put in $50,000, that's a 6.7% profit.  Not terrible, but not good.  You would do better and with less hassle in the stock market.

The other way is to measure return on capital (borrowed money + your funds).  If the total purchase price was $200,000, then for every $100K spent you are making $140 each month.  If the total purchase price was $400,000, then you are making $70 each month per $100K spent.

In conclusion: we need more information.

Good deal on a duplex?

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