Analyzing A Deal. What are we doing wrong?

Member since 2018 · 5 posts · 0 votes

We found a good deal on a duplex in Puyallup, WA. Duplexes in this area have been going for $380,000 and above. After running the numbers, it does not seem to be as good of a deal as we thought. Are we doing something wrong in our calculations? We are using our VA loan, and will be living in one side at first, however we estimated the rental income for both sides once we move out. We are also not putting any money down, since we are using our VA loan and are not required to.

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Chace Fraser

Realtor · Portland, OR · Member since 2017 · 357 posts · 259 votes

Hi @Adam K.

If you are using a low down payment, it's not really realistic to expect to be cash flow positive. When an investor is looking at being cash flow positive, they are typically putting down 20-25%. If you are in a high demand metro area, it's simply not realistic to expect to be cash flow positive if you are putting down 0-10%.

Now if that is all the capital you have, that is what it is....is it better to keep renting than to buy? Typically it is better to buy. Better to build your own equity through the debt pay down, enjoy the tax benefits of ownership, and garner the equity of an appreciating asset. You just can't expect to cash flow on an initial purchase with a low down payment. Now with time and rent growth, what could be a negative cash flow property might very well become a cash flow king, but that takes patience.

Another way to increase cash flow would be renting out rooms in the unit you live in, either Airbnb or longer term.

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Adam Gollatz
Rental Property Investor · Milwaukee, WI · Member since 2016 · 180 posts · 161 votes
7y
Hi Adam,
The term good deal is very relative. I assume you are referring to it sounded like a good deal because it appears to be under market, but it is looking bad because it doesnt show positive cash flow? To answer your question, no your calculations look spot on, its your expectations that will be off.
Every market is different, but generally speaking, higher end properties (380k duplex is likely high end) tend to cash flow less. To make matters worse, the VA loan will require you to buy a turnkey property eliminating chances for forced appreciation and going no money down raises your monthly payment just a little bit more.
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Adam K.
OP
Member since 2018 · 5 posts · 0 votes
7y
@Adam Gollatz, You are right, this is a good deal because it is under market value and we know that we will have 50k equity as soon as we sign. Is putting down a larger down payment the only way to make this deal work? The property is turn key and the seller has already agreed to replace the roof. I just don't want to pass this up, it seems like even the "deals" are just traps.
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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
7y
@Adam K. what are your goals with this property?
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Adam Gollatz
Rental Property Investor · Milwaukee, WI · Member since 2016 · 180 posts · 161 votes
7y
There are a few things you can do that will help out.
1 - Know your rental numbers. You want to be spot on with what it will rent for. Im assuming this is your first property and you've been renting for a while so you are hopefully in tune with your rental market. You can easily see how an extra 150/unit/mo can turn this from an easy no into a maybe.
2. With that being said, don't start changing numbers. Its easy to make the numbers justify the sale. Raise the rent, cheat the maintenance, Boom, its a good deal. If you have to make a change to a number and it goes from a no to a yes deal, have it double checked by yourself and another set of eyes or two.
3. Look in different areas. Try the edge of where you are looking because rental numbers can hold constant through areas where selling prices fluctuate. There are thumb rules to save you some time, Id say look for a property where the monthly rent is around 1% of the purchase price (for this deal 3300/mo). The higher the better. That should get you closer to what you are looking for and save you a lot of time doing in depth analysis for nothing.
4. The VA loan will allow you to go up to 4 units. More units tend to be more efficient for your numbers. Verify with your lender, but a duplex with a cottage home/guest house could qualify. It doesnt always need to be a single building.
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Adam K.
OP
Member since 2018 · 5 posts · 0 votes
7y
Our goal is to buy and hold long term. We will live in it for the first year or two, possibly longer if we need or want to, and then we will rent out both sides. We plan to make cosmetic improvements to the properties, like making the kitchens nicer, and hopefully finding a way to move the washer and dryers inside to each unit. They currently share a washer and dryer that is located outside. None of these items are things we have to do right away, the property is turn key as it sits. There is also a tenant currently living in one side. We want to add value to the property so that we can increase the rent to market value.
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Jill F.
Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
7y
if your goal is to subsidize your rent, it is a good deal. I don't see many deals in C+ or better neighborhoods that cashflow well even in Ohio with less than 25% down.
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Sean Ade
Real Estate Agent · Member since 2018 · 89 posts · 25 votes
7y
Hey Adam
I'm in a similar position- i'm trying to find my first duplex to buy in Portland. I still haven't purchased a deal but to me this seems like a good deal.
The way I see it is you have a negative cash flow of $256 but, i'm guessing since the numbers look similar to Portland, you probably pay over $1000 in rent. So in that sense you're going to be saving $800 a month now because you only cover the $256 that the other side won't cover.
Then once you move out in 2 years and rent the other half, you'll be making cash flow plus have equity in the house. I think it's a win!
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Adam K.
OP
Member since 2018 · 5 posts · 0 votes
7y
@Sean Ade Hi Sean. The -$256 is after both rents are factored in. The $2700 per month is monthly rent from both sides once we move out and have made improvements to the property. Some of our calculated expenses might be a little high, especially since we plan the manage the property ourselves for a long time. But we also do not want to be fudging the numbers to force this deal to work, if it really is not a good deal. We want to be prepared and plan for anything that may come up and cost us money in the future with this property.
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Brian Garlington
Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
7y
@Adam K.
Is anyone getting the 1% rule in your market? IS it possible the duplex is overpriced? You're paying 380K for a duplex that when fully rented does not come close to the 1% rule. In the SF Bay Area where I am, I bought a duplex I'm house hacking using the VA Loan, and I knew that I would not get the 1% rule,......but
1. I offered less than what was being asked.....it's an investment property so the sellers EXPECT you to offer less.
2. When the Home Inspection Report came back we found things that made us counteroffer for a lower price.
3. After all was said and done it still did not meet the 1% rule,.....but after all expenses I am still cashflow positive.
4. I am hoping for appreciation, however I am not banking on it....You should not go into a deal relying on appreciation and settling for anticipated negative cashflow because of it.
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Chace Fraser
Realtor · Portland, OR · Member since 2017 · 357 posts · 259 votes
7y
Hi @Adam K.
If you are using a low down payment, it's not really realistic to expect to be cash flow positive. When an investor is looking at being cash flow positive, they are typically putting down 20-25%. If you are in a high demand metro area, it's simply not realistic to expect to be cash flow positive if you are putting down 0-10%.
Now if that is all the capital you have, that is what it is....is it better to keep renting than to buy? Typically it is better to buy. Better to build your own equity through the debt pay down, enjoy the tax benefits of ownership, and garner the equity of an appreciating asset. You just can't expect to cash flow on an initial purchase with a low down payment. Now with time and rent growth, what could be a negative cash flow property might very well become a cash flow king, but that takes patience.
Another way to increase cash flow would be renting out rooms in the unit you live in, either Airbnb or longer term.
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Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
7y
@Adam K. Your projected $50K in equity is make believe money. As the market turns down, your equity will shrink, not to mention tapping into that equity costs money. I would also count on taxes to continue to rise in your area due to political considerations. This is not a terrible deal, but I wouldn't call it a good deal.
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Anthony R.
Property Manager · Lakewood, OH · Member since 2015 · 250 posts · 258 votes
7y
I just want to echo what @Adam Gollatz said above about what a "Good Deal" is. I laugh every time I hear this now and I still say it!
- When I first started, a good deal was one I could afford.
- A couple years later, a good deal was one that let me live for free
- Shortly after that, a good deal was one that cash flowed
- A couple days ago, I turned down a deal because netting $500 a month (just over 100 per unit) wasn't enough. That was a bad deal to me lol
A good deal is a relative term and it's constantly changing as you grow. A good deal for me now is something that nets at least 250-300 a door. I'd never consider a building that has a negative cash flow unless its potential was positive. Honestly I rarely even look at buildings that aren't making me money the second I take over. It just doesn't fit in my business model. If I needed a place to live though, that'd be a different story.
For what it's worth, I lived in Washington while stationed at JBLM and I know that the area you're looking in is nice. Anything is better than living on post with the nosy neighbors and the MP's :-D
Good luck to you guys.
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Dan Leaman
Investor · Puyallup, WA · Member since 2016 · 14 posts · 5 votes
7y
Hello Adam, you may have found a good rental property or you may have found a good but high priced rental property. My experience in Puyallup is that it will rent due to location-location-location. Puyallup is a hot location has been for some time and most likely will be for a long time to come. Its proximity to Seattle, JBLM and Tacoma makes location and A+. With that said, long term investments where people want to live is always, in my view, a good idea. But buying a non cashflow property even if you can cover the negative portion is going to be a drag on your future investment goals. If you get positive cash flow you will have a much rosier outlook on the property itself and on investments in general. So what can you do to make it cash flow vs being cash negative? Look for what the maximum rents could be for both sides of the duplex if you can get $1650 per side then you are great. If the max rents is $1350 per side then put larger down payment so that your mortgage is covered by the rents. Don't forget property tax as well as maintenance and manager. Good luck let us know how it goes. Just as a curiosity did you find out why the current owner is selling?
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Dennis M.
Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
7y
losing money every month isn’t a good deal to me . Don’t bank with make believe money ( appreciation) . If the deal can’t stand on its own two legs -then it sucks. Keep looking . If you can’t get 1% rent then keep looking because the reality is it will go negative if there’s not enough( or very lIttle) cashflow .
1 Reply
Andrew Jones
Insurance Agent · Sacramento, CA · Member since 2017 · 45 posts · 33 votes
7y
If you are buying with low or no money down with the expectation to live in (and off of) the property it would be wise to budget more than $1000 for repairs. How old is the building? When was the last time updates were made and were they done properly? Our story is similar to what you're looking at doing.
My wife and I house hacked a duplex in Sacramento Ca which was a real dog when we bought it. $330k purchase price, one unit occupied paying $900 per month...woof. We put $70k down so we weren't feeling too flush, BUT at least with all expenses in we were only losing roughly $400 per month...less than a third what we were paying to rent. After four years of scraping, painting, repairing and renovating (hundreds of hours and roughly $30k supplies) we're doing a little better. We moved into a single family home and today we are grossing $3100 (netting almost $1000 after expenses and cap ex). Comparable duplexes in the area without renovations are selling for $460-560k, but that may not matter as we don't plan on selling and like be roughly 50% LTV.
Moral of the story is we bought too high and had to bail ourselves out with improvements. It also doesn't hurt that people are fleeing SF and driving up our rents and values too, but who knows how long the tech gravy train will keep chugging along.
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Douglas Gratz
Rental Property Investor · Philadelphia, PA · Member since 2018 · 260 posts · 145 votes
7y
@Adam Kennedy Before I go into if it’s a good deal, let me ask, what is your goal or what are your Investment goals? Are you trying to make money from appreciation, are you trying to use rental income to subsidize your current income, etc, what is your end game/what do you want to accomplish as you invest in real estate?
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Denise G.
Bay Area, CA · Member since 2018 · 46 posts · 32 votes
7y
some would say 0 down is a good deal. some say $500 cashflow is great ( but they put down a huge chunk of money). as all said. It just depends
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Matt J.
Investor · Tacoma, WA · Member since 2016 · 120 posts · 112 votes
7y
@Adam Kennedy How big are the units? Beds? Bath? Garage? I don’t want exact location but if you provide and general area I can tell you what to expect in rents. I’m local and know Puyallup well.
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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
7y
Originally posted by @Dennis M.:
losing money every month isn’t a good deal to me . Don’t bank with make believe money ( appreciation) . If the deal can’t stand on its own two legs -then it sucks. Keep looking . If you can’t get 1% rent then keep looking because the reality is it will go negative if there’s not enough( or very lIttle) cashflow .
So, you would turn down something that had a negative cash flow, even if it was in a rapidly appreciating area and the upside potential was far more than a few years of negative cash flow?
I guess I am just not understanding this focus only on cash flow - Cash flow is about how much $$ you put down..... any property will cash flow if you pay cash.....
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Anthony R.
Property Manager · Lakewood, OH · Member since 2015 · 250 posts · 258 votes
7y
Originally posted by @Mary M.:
Originally posted by @Dennis M.:

So, you would turn down something that had a negative cash flow, even if it was in a rapidly appreciating area and the upside potential was far more than a few years of negative cash flow?
YUP! Appreciation over a couple years? Screw that. If I'm not making money immediately or at least in a few months I would never ever consider it.
Cash Flow is KING
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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
7y
@Anthony R. for the sake of argument, would you turn down house that cash flowed -450/month but that you could sell in a year for 30k profit?
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Andrew Jones
Insurance Agent · Sacramento, CA · Member since 2017 · 45 posts · 33 votes
7y
@Mary I think the issue with buying for appreciation is the speculative nature of it. You have to ASSUME that prices will continue to increase, your flip goes smooth, etc. This sunk a lot of people in 2008 and in a lot of places around the county just doesn't happen in a meaningful way. It's not a great feeling losing money monthly while hoping the market goes back up eventually. This strategy can work but I'd argue it's better suited for buyers who have the liquidity to bail themselves out if necessary. The upside is you are leveraging tenant rents to pay for your assets and that loan will get paid off eventually.
@Anthony R. Cash flow day one feels safer, but that is not a guarantee either. What if a major (or the only) employer in town moves out? People get laid off, stop paying rent and property values will decline. Flint Michigan is a great example (and GM is downsizing again...how timely). The grief of trying to collect rents in a war zone may not be worth the income. I'm sure there are places with multiple stable employers that will cash flow day one, but I'd argue these are not in big growth markets like WA where Adam is trying to house hack.
We're just looking at different perspectives from different markets. Mary's market in OR has been hot and will likely continue to be, where Anthony's Ohio market probably won't appreciate much but you can buy great cash flow.
The nice thing about a house hack @Adam K. is considering is that it defrays your living costs, has tax benefits, you can bust some sweat equity and (theoretically) will let you ride out a correction. The calculation seems right as you are losing money on paper, but you have a tenant helping you build equity and rents typically trend up. I would see what comps are renting at, how long they sit on the market, and how increasing interest rates are likely to impact local housing prices. You want to be critical of any potential investment, but if it's this or buying a single family home to live in the choice is obvious. Just think about how long you want to live there and if you could suffer worse accommodations for greater cash flow (like a 4 plex). I personally wanted to do a 4 plex in a war zone for 2 years, but my wife wanted a single family home...the duplex was our compromise and it has worked out well for us. Good luck!
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Anthony R.
Property Manager · Lakewood, OH · Member since 2015 · 250 posts · 258 votes
7y
@Andrew Jones You can pitch what if scenarios all day. What if an asteroid strikes? What if a hurricane happens? What if my leg falls through a step and gets eaten by a homeless guy living in the basement?
The fact of the matter is, appreciation isn't guaranteed. It's highly unpredictable and is very dependent on the buyer.
Rent on the other hand, is very predictable. I can look at what other units in the immediate area are renting for, I can look at rent trends in the area, which move slow so they're easier to predict. Also, as I said, I look for buildings already cash flowing. So I like things that I'm making money on day one.
Now does that mean you can't make money with appreciation? No, of course you can. I said it doesn't fit MY business model. My business model says "Buy cash flowing buildings because they're abundant in my area, easy to fold into my business and most importantly, that's what's made me wealthy"

@Mary M. Yes, that's correct. I would never buy a building with a negative cash flow unless it was empty and I knew the area could fetch a certain rent which made it a positive cash flowing building. My business model is buy cash flowing buildings. Build cash flow. Buy and hold cash flow buildings. Not, buy building and pray market increases.
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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
7y
I guess i did not realize houses did not steadily appteciate all over the US like it does here. Appreciation is not really speculation here. Sure another 2008 might happen but as long as you are not over leveraged who cares?
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Adam Gollatz
Rental Property Investor · Milwaukee, WI · Member since 2016 · 180 posts · 161 votes
7y
@Mary M. I read a statistic saying the average appreciation of homes is around 3-4% If you take into account the hot markets going up almost double digits, that leaves some markets near flat. We all invest differently, depending on our scenario.
I think for someone starting out, without a lot of money to put down a down payment, buying for appreciation is not a recipe for success. The numbers you run on your first venture are always a little off after the first year(maybe taxes jump after you purchase, insurance goes up, etc). If you run the numbers perfectly and you end up with a house that breaks even, you still have the very likely scenario of a big expense before your calculated capex/repair and vacancy reserves are built up; tenant moves out, something needs to be fixed, etc.
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