1st REI advice - debating property in U-City, need objectivity

[Cole Donelson]

Hi All,

I am planning my first real estate investment and just found Bigger Pockets. I have been devouring their podcast and a few blog posts for about a month, which set me on the path for buying an owner-occupant duplex with a 3.5% down FHA loan that we will live in for ~3 years. We found a property we really like in U-City (https://tinyurl.com/y9s7u3gu) and have it under contract, but needed repairs surfaced that put it on the borderline of not making financial sense. I've tried applying the rules of thumb and running the BP rental property calculator, but at this point I'm definitely not objective. If anyone is willing to share their thoughts on any of the 3 queries below I would be eternally grateful.

a) Is U-City a good area to invest?

b) Are rules of thumb like the 1% rule and expenses = 50% of your income applicable and an appropriate standard in St. Louis? 

c) Is this property is a deal you would make and why?

For anyone interested, here is the background on the property...

1. We saw it after it went back on the market at $295k after being under contract at $339k and the buyer backing out for "no fault of the seller" (reason was not disclosed). The seller is supposedly "motivated" and one unit is currently rented until June at $1,275/mo. After one day on the market it already had one bid and we were the second to put down an offer. It is being sold "as is."
2. We got it under contract, but the inspection determined we would have to replace a garage/basement wall and we had to extend the deadline to commit until this Friday to get some bids for repairs.
3. We have reached the seller's bottom dollar of $280k ($15k below listing). However the bid to replace the wall is $25k, bringing the price after must-have immediate rehab to 305k.
4. We think it could be a decent deal based on the fact that
• Comps in the area include two duplexes sold recently for $309k and we believe those duplexes in a bit worse condition on a bit worse streets (and don't face a park). Also, the properties on either side of us sold for $338k and $390k in 2017. This property last sold in 2003 for $299,000.
• U-city appears to be a stable area with good "appreciability" being close to Clayton/WashU
• Rents in U-city are some of the highest we have seen for duplexes in STL.
• There is room to update the kitchen and a few other areas in each unit to add value and then raise rent.
• We like the home and location for ourselves and would enjoy living in that neighborhood with quite residential streets and nice park access for ~3 years.
5. Negatives include
• The immediate, significant repairs needed and the riskiness of that.
• The house is 90 years old and seems to have an above average number of "smaller fixes" necessary, as the owner seemed pretty lax with maintenance.
• The fact that it fails two rules of thumb we've seen around BP for a good deal:
1. Estimable expenses = 50% of income; therefore when fully rented at $2800, estimated expenses = $1400 and our mortgage is estimated at $1800 meaning we are cash flow negative at -$400.
2. The 1% rule; $2800 rent isn't quite 1% of $305k (price after rehab)

Thanks,

Cole