Newbie, Duplex, to buy or not to buy...?

10 Replies

Hello BP,

So I have been anxious to pull the trigger on my first deal for some time now. I’d like some advice or even some experiences given my situation. The property details are explained below.

I reside in SD California looking to invest in a rental property in the Inland Empire area. The property is in the Inland Empire, Eastern Riverside County.

  • $150,000 (asking price)
  • Multifamily Duplex
  • 2 bed, 2 bath ea. Unit
  • 1474 sq. ft.
  • 7,405 lot sq. ft.
  • built in 1950

Renovations:

  • new interior and exterior paint
  • dual panned windows.
  • hard wood floors
  • “Well maintained” (haven’t viewed property yet)

I will be using an FHA loan from a private lender to finance the property and would like to get a personal loan from the bank to finance the money down. I would like to have no money down. Both units are occupied and the owner just signed a new yearlong lease for both units. The rents total less than 1% of the asking price (~.85%). Not too sexy if you ask me.

The numbers don't look that good according to the 1% rule and 50% rule. I believe it's due to the type of financing I am pursuing. My PITI, insurance, and taxes seem higher because of the financing I am choosing. However, my funds are limited and I don't have many other financing options. The appreciation seems good given the location of property and community potential. However, I do not want to bank on this given what I have heard regarding wise investments.

I hope this was enough information to get an idea of what I’m working with. If not please ask for more. My question is this, is this a wise investment given the property information, financing, potential cash flow, ect.? WHAT ARE YOUR THOUGHTS?

My hope is to improve the value of the property over time as an on site landlord as well as gradually increase the rent to increase cash flow potential. Unfortunately, the numbers seem like I won’t be in a positive cash flow situation during the term of the current tenants lease (1 year).  Seems like I may have to contribute slightly to compensate until I can increase the rents or gain some equity.  Is it worth it...?  Is my finance option wise given my situation? 

I would say it's banking on too many good ifs. What about the bad ones?if the market "corrects", rent goes down, they trash it, don't pay etc. I think is keep looking until you find something you can get a positive cash flow on when you start at least. Otherwise you are just hoping it will cash flow in a year, and have to try and recoup what you put into it.

Unless you have reason to believe a boom is coming to that area, I would offer a number that let's you make at least $100 per unit. If they don't take it i say walk.

What's the market rent?  What's the current rent with the leases, if they are different?  What are taxes and insurance?  Older property, what kind of neighborhood and tenant class?

@Michele Fischer Average rents in the area are $1000-1300. The current rents are as follows, unit A $575 and unit B $700 (total=$1275). Given my loan the taxes and insurance are roughly $380/m (PMI, Hazard, taxes, prop. ins.). Lower middle to lower class community. No major aesthetic problems in the community, some homes are well kept some aren't. Neighborhood I'd say is a 6 (1-10 scale). I haven't meet the tenants nor seen the interior of the property yet.

Originally posted by @Michele Fischer:

What's the market rent?  What's the current rent with the leases, if they are different?  What are taxes and insurance?  Older property, what kind of neighborhood and tenant class?

Michele, the average rents in the area are $1000-1300. The current rents are as follows unit A $575 and unit B $700 (total=$1275). Given my loan the taxes are roughly $380 (PMI, Hazard, taxes, prop. ins.). Middle to lower class community. No major aesthetic problems in the community, some homes are well kept some aren't. Neighborhood I'd say is a 6 (1-10 scale). I haven't meet the tenants nor seen the interior of the property yet.

Are you saying that if you found a tenant the market rent would be $1,000 each side but the seller locked you into well below that?  If so, he hosed himself and you.  Or are you saying that with more capital you could get the rents up?

I can't make this deal work even with a $100K asking price.  I wouldn't buy a negative cash flow property as a newbie.  Too many things can go wrong, including the favorable market rent assumption.

Originally posted by @Michele Fischer:

Are you saying that if you found a tenant the market rent would be $1,000 each side but the seller locked you into well below that?  If so, he hosed himself and you.  Or are you saying that with more capital you could get the rents up?

I can't make this deal work even with a $100K asking price.  I wouldn't buy a negative cash flow property as a newbie.  Too many things can go wrong, including the favorable market rent assumption.

 No, I'm saying the typical rents within a 1-3 mile radius of the property range between $1000-1300 for a 3 bed 2 bath home.  But, yes I will essentially acquire a property with 100% occupancy with tenants locked into those rents for one year.  

I agree, thank you...

@Tajh Walker  

Given the limited information that we have here, I would say that it seems like you should keep looking for properties, this one seems to be too risky a venture. It looks like it fails on all of the "rule of thumb" metrics, i.e. the 2% and 50% rules at the current rents. Maybe you can adjust the rents to the $1,000-$1,300 market range that you mention, once the current tenants' terms expire, but I would probably expect some sort of compensation (price reduction) from the seller for the inherent negative cash-flow situation upfront and for ultimately having to turn both units over within the first year.

It couldn't hurt to get in and at least check out the interior of the property if it still interests you at this point. Walking the property should help you get a better feel for the investment prospects and you may notice or uncover something that will make you lean more one way or the other.

@Tajh Walker ,

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Raymond

@Tajh Walker , I would seek advice from So-Cal investors/landlords. I am far from being an expert... maybe seek the advice of Aaron Mazzrillo since he works out of Riverside.He was on one of the podcasts. 

Think of the 2% rule as something similar to the PE ratio in the stock market. PE ratios are different for different markets. In metropolitan areas of So-Cal you will be hard pressed to find a 2% deal in 2014. 

If your duplex is listed in on the MLS or if a Wholesaler is marketing it, I think it would sell within 24 hours. Personally I wouldn't mind losing a little bit of money for the first year for a property that will make 1.5% for the following ten years. I know you can make more in other states, but if you want properties in Riverside then the deals aren't as good.

If you do your own marketing and buy direct from distressed sellers, maybe the story is different. A property that's listed on MLS or under contract to an investor will probably not sell with 2% income anywhere in the Inland Empire.

I hope I am wrong. Is anyone buying deals today in the Inland Empire / Riverside that make 2% rent? 

If you use fha financing on a non owner occupied property you could get in trouble if the lender finds out.

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