Duplex with solid cash flow

43 Replies

Hey BP,

I'm looking at a duplex about 30 minutes outside of my hometown and right now, it seems too good to be true. This would be my first investment property & I was hoping to get some feedback on the numbers to see if I'm overlooking something, or underestimating the amount of time and work that goes into tenant management. So here we go:

  • It's 1800+ sqft
  • each unit is 2 br 1 ba
  • it's section 8 approved and both tenants are currently utilizing vouchers
  • Asking price is $115,000, but I'm going to offer $80,000 to start the negotiation and will settle on anything up to $100,000
  • Rent is $920/unit ($1,840 total)
    • Of that, 80% is subsidized by S8
  • Taxes were $2,775 last year
  • Operating expenses are $2,100/year
  • Total annual expenses including taxes were $4875
    • This number excludes debt service as the current owner carries no mortgage on it

Given those numbers, the old owner had an NOI of roughly $17,000. Including debt service and a larger increase an monthly maintenance, I'm looking to cash flow about $375/month. I'm planning on using a HELOC for my down payment and financing the remaining 80%.

So am I crazy for not jumping on this sooner?

Thanks for any input,

Jay

Here is a couple snap shots of the cash flow calculations I've done. I made a couple tweaks to it since I ran my numbers listed above.

I like the numbers Jay.  They fully support the property and cover the expenses.  Hopefully there are no other competitors.   Good coin in your pocket.   

I had a deal in Atlanta that I slept on about 6 months ago.   It was a rental in an ok area.  Not the best.    But was only selling for 10k.    1 side was already rented for $500per mo.   The other side needed about 1k in cosmetic fix up.   Section 8 approved I believe.  That property is cashflowing nicely today.   

Good Luck to you!

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Hi Gerald,

Thanks for the vote of confidence and affirmation of the numbers. I don't believe there have been any other real offers yet, but there is some interest according to the listing agent. I'll keep you posted on the progress here is you're interested in following!

Are you originally from Charlotte? I spent 13 years between Chapel Hill and Wilmington and love it down south!

Jay, 

I plugged your numbers in to my home-brew calculator and it looks like you're going to turn a 22% gross cap rate excluding debt service if you get the property for $100,000. If you manage the property yourself then you're looking at roughly a 16% net cap rate which is unheard of! That's some solid numbers my friend! Good find! Don't negotiate too long or someone else will steal this from you.

Why are there no expenses for lawn, snow, etc.?  What about a percent to go towards capital expenditures, e.g roof, major systems, etc.?

@Troy Knight  thanks for double checking those numbers!  I'm pretty excited about this one. Let's just hope it works out. 

@Rick Baggenstoss  The snow removal is free due to an agreement made with the neighbor. He plows the shared driveway in exchange for being able to push the snow into this property's yard. As for lawn etc, I built that into the maintenance  number of $350/mo. As for cap ex, I don't have anything really figured as most of the major repairs have been done. Roof, water heaters, foundation, etc. The rest is section 8 inspected and approved. The current owner is a contractor/investor and wants to cash out this property to pursue his next big project. 

In case anyone is still wondering how this is going, I made my official offer yesterday of $80k. The owner has until Monday to accept or counter. I'm hoping for the best but, I would imagine he'll come back at $105k or so. I'll continue to update this feed as I work my way through. Thanks for the support BP!

Locked in a contract at $103,000. Should be closing in the next 3 weeks!

Sure. It's in a small city called St. Albans.

@Jay Mitiguy  I was reading up on the market in Vermont. Looks like decent returns and you can enjoy powder days at Stowe :) 

If I can offer some advice, be careful getting over leveraged.  You need an emergency fund or access to more credit in case of.  I've been there and it hurts to carry $20,000 at 28%!  

Congrats Jay, thanks for updating us on your first deal. Let us know when you close. 

I would echo Rick's comment. The snow removal agreement is not legally binding I imagine. Even if it was, the guy gets hurt or sick it isn't getting done. The bigger problem is that yiu definately need to account for capitsl expenditures. Just because the roof, furnsce, water heater, plumbing and electrical is good now doesn't mean that can't change in a hurry. Set money aside to replace these major components as these things age. If ai buy this house in 20 years, I will be writing down a big allowance for all those components so you will be paying for it....

But still looks like a great deal numbers wise granted that everything is in pretty good condition and relatively updated. I didn't see an age on the house. Also wbat is the actually market rent if not rented to section 8 tenants?

Originally posted by @Jay Mitiguy:

Here is a couple snap shots of the cash flow calculations I've done. I made a couple tweaks to it since I ran my numbers listed above.

 Fantastic spreadsheet jay! Great detailed breakdown

Thanks @Phil C.  It's actually an old sheet one my real estate finance professors had given to me back when I was in school. Works really well!

@Kurt Kwart  Thanks for the heads up. I have a home equity loan I just closed on so I have some reserves in place at prime plus zero. The first 6 months are at .5% so it's damn cheap money. Thanks for the vote of confidence too. Stowe is a nice resort but way to rich for my blood. If you're ever Up this way feel free to drop a line and we could grab a coffee and talk shop. 

@Jay Mitiguy  Sounds good!  If you haven't read up on elimination with sec 8 search around BP.  This is a good intro http://www.biggerpockets.com/forums/50/topics/83224-section-8-bible Biggest lesson I learned with sec8, don't take side deals over the offical rent amount.  I plead young and naive, the tenant was very convincing!  Now I play by the rules and use it to my advantage.  

@Kurt K. Thanks. I'll check it out. I've done a fair amount of research and wouldn't consider working side deals with the S8 tenants. It leads to nothing but trouble and their existing rents pay after debt service and all expenses and cap ex. budget, would cash flow about $250/month. Why risk positive cash flow for a little extra dough?

@Jay Mitiguy  

YES!!  Another VT property owner :)

St Albans is a fun little town.  I'd look more up that way if it wasn't 5 hours away.

From my personal experience... I put $150/month away for CAP EX and have done well with that number over the years. If all goes well, you end up selling the place down the road for a hefty profit and still have cash in your CAP EX account. If you need to fix the big stuff, having 5k in your pocket makes the crying shorter :)

Congrats on the contract.  Happy Landlording!

@Aaron Montague Where in VT do you own? I can't seem to find anyone in VT on BP. The local REIA is a joke and I feel like I'm on an island up here! Would love to catch up if you're ever up this way...

When you say you put away $150/mo for cap ex, is that per unit or per building? Just trying to get a grasp, because I believe I calculated $300 for cap ex when I revised my numbers for this property. I do have access to another $12-15k in my HELOC so that is a nice little cushion if something comes up early on in my landlording.

Have a good one!

@Jay Mitiguy  

I have 7 units in Rutland.  And hopefully will be adding 4 more in the next month or so.

My folks live in Springfield, but I generally make it up to the Burlington area at least 1/year. Keep fighting for the progress of the REIA. They need champions to keep them going :) There is a ton of money in Burlington right now, I'd look to have the REIA downtown there.

I put $150/month/roof for my buildings. Your place sounds like it is good shape today, so I would imagine you can build the CAP EX account slowly without too much hassle. If you knew big ticket items were coming, I'd put $5k in the CAP EX account now and slowly let the business pay you back.

@Aaron Montague

Very nice. How long have you been at the real estate investing game? Congrats on the next 4 as well. Exciting stuff for sure! Southern VT is a great area, but I rarely make it down unless I have to go for work... You're absolutely right about Burlington and there being lots of money. Unfortunately because of that, property is pretty expensive for a new investor, hence my attraction to St. Albans and the outskirts of Chittenden County. The REIA actually tries to meet monthly in Burlington, but the existing membership is about 12 people, of which 75% can't make the meetings. I've been trying to attend one for 3 or 4 months now, and have yet to see one held. They are always cancelled due to low RSVP'ing. How would you advise going about championing that process? The current "President" doesn't own any investment property and seems pretty unmotivated from what I hear.

@Jay Mitiguy  

I would stick to Burlington simply because the people that live there make more money than anywhere else in VT :)

As far as championing the process, build your membership with consistency. Make sure you schedule meetings at the same place month over month. Most places in Burlington would love to have your (hopefully growing group) take over a back room in their establishment on a Tuesday or Wednesday evening. The local REIA seems to have an established pattern of not meeting, so that would strike me as the general feeling of anyone who might want to be involved.

People are always busy, so they need a reason to drive 30-60 minutes to come to one of these things.  I'd try and have a light topic of discussion available at each meeting.  You could start it with 5 good and 5 bad things about my St Albans deal.  It isn't formal, but it gives 10 talking points to everyone in the room.  Heck the "presentation" might only be a chart with the items listed.

I'd have another big sign posted near your meeting space that invites anyone that walks by in for a meeting.  One never knows when your next investor might be sitting at the bar or a couple looking to move a house quickly may be enjoying their last Burlington based meal.  Plus it makes sure than everyone knows they are in the correct place for the meeting.  

Basically what I'm saying is that it needs to be marketed and then actually meet.  Investors are a talkative bunch.  Even 3 people sitting at a table will provide a great deal of insight for each participant.  Promote it here, put it on Facebook, tell everyone you know, invite Realtors/Contractors/Bankers and make sure they are bringing people in as well.

@Justin Silverio  - Would you add anything to the above recommendations? 

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