Starting out and kinda confused

8 Replies

Just wondering what do yall look for when looking at duplexes.

I saw a duplex that is going for 225k in a decent neighborhood. I havent been to the property yet but it looks fairly well from the pictures. Its 4 sided brick with two new tenants. One signed a year lease this month and the other last month. Both pay close to 1k. The notes say instant cash flow from day 1.

This seem like a great deal but can it be? Why would someone let this go if its making them money?

@Quentin Brown

Keep in mind that the property would be under the 1% rule if sold at asking price, meaning it may be losing money. A lot of things factor in to how well this property does, especially how it is metered for utilities. The current landlords may very well be losing money over the long run which would motivate them to sell.

@Quentin Brown just speaking off the cuff and only going off the information you put out, this is not a great deal. the property is 225k and is grossing 2000 per month. that is not even at the 1% rule. depending on the condition of the property, what repairs you will need to do, vacancy rate and your debt service, i am not so sure you will be making any money at all. unless your market is expensive and deals are hard to come by, i would probably pass on this one. happy to help further. just let me know!

First off, "instant cash flow from Day 1" isn't the same as POSITIVE net cash flow from Day 1! It might be. But you gotta do your own math. Just because a seller/agent/wholesaler implies it is a good cash flow, doesn't mean it is. How would they even know? They don't know what your loan terms will be. And that's because they're usually not including the debt service ;). But you need to.

Pictures can lie also.  You need to see the house, in person.  And, if you're still interested, an inspection report will give a real look of the house's condition.  I can't tell you how many times the pictures in the listing look so much better than the actual property, once I've seen it.  If you're local, drive by it and you can at least get a feel for the neighborhood and the condition of the exterior.

People let go of properties that do or can make them money all the time, for a lot of reasons.  Maybe they're moving.  Maybe they don't like owning rentals.  Maybe their downsizing their portfolio.  Maybe they're upsizing their portfolio and want to get out of multi's and into apartment buildings.  So I wouldn't necessarily see that as a bad sign.  If it was, the whole buying and selling of rental properties would come to a halt!

Here's what I include in my analysis for a buy and hold rental. I break it down by the month. Other people's mileage may vary:

--Mortgage payment, property taxes, insurance

--5% of rental income for repairs, 5% for CapEx, and 8% for future vacancy (this accounts for 1 month out of the year the rental is vacant). You'll often do much better than that on the vacancy number. But it's better to be conservative, than be unpleasantly surprised.

Now this is where I typically stop because the rest of the list doesn't apply to properties I target.  But here are some other potential expenses...

--Utilities (if they're included or will be included in the leases)

--HOA fees (if applicable)

--PM fees (if applicable).  But also keeping in mind, even if you self manage, you'll still be spending your own time which also has a value.

You won't necessarily have exact numbers for all of those.  But at least with some educated guesses, you can tell if the property is even worth pursuing and spending time on to get more exact expense numbers.

Prepare for the shock of crunching those numbers for the first time!  What initially sounds like a good chunk of rent is surprisingly so much less once you plug in the real numbers of how much it costs to own rental property.  I've heard on the forums that $150-$200/month/per door in net rental income is considered good.  I personally do much better than that in my area.  But I'm also very selective in what I buy and typically go for the cheaper fixer-uppers.  Though always be careful to look at your "all in" cost (including rehab) and extra holding time, if going this route.

As others have said, doesn't look like it will cash flow. But backing up a bit... I think there's a lot more you're going to want to understand about what makes for a profitable rental property. Once you are more up on that, you'll know better whether something is actually a deal or not.

@Quentin Brown I think you were getting some good advice here. Have you used the BiggerPockets rental calculator? It is a great asset and I would recommend watching Brandon video and how to use it.

We will consider anything below a 1% deal, and prefer around a 1.2% or better deal. I figure a total of 30% of rent to cover repairs, capex, vacancy, and Property Management. Most people do not factor in enough for these items. It could be that the current owners repairs capex have been lower than last few years, but that just means you're closer to needing a new furnace, roof, etc

for each potential deal I run through the calculator I might take it harder look at 1 out of 10, and of those worn out at 10 maybe consider making an offer on two or three.

I appreciate everyone solid advice. I'm trying to understand the numbers better to use the calculator but it's all still new to me. I understand the whole process of flipping and wholesaling but still trying to wrap my head around how to calculate everything. 

My job requires me to drive all day long so I'm constantly seeing distressed properties so I'm just trying to learn to analyze the numbers now to see if it's a good deal. Thank you everyone