4% Rule Duplex!! Tons of equity!! No way, right??

Question

Greetings All,

I've been crunching these numbers and running different scenarios to exhaustion. As crazy as the margins are, it still seems like a good buy. Lots of work is needed, but the spread leaves tons of room to accomodate unforseen expenses and still cash flow very well in addition to the equity. I'd love to know if anyone else would feel the same were they in my situtation.

Here are the numbers and Data:

• 1918 Duplex
• 6 Bed/2 Baths
• 2,281 sq.ft
• Banks Asking Price: $99,000
• My Offering Price: $75,000
• Estimated Rehab: $50,000
• Estimated Closing Cost: $3,000
• ARV: $220,000 (Conservative Estimate by multiple local agents)
• Estimated Rent (Conservative): $3,000; (Realistically $3200-3700)
• Verified Property Tax: $7,330/ann; $610/mth
• Verified Vacant Policy Insurance: $219/mth
• Verified Occupied Policy Insurance: $260/mth
• Flood Insurance: +$250/mth (Needs Elevation Cert: $350)
• NJ Landlord Fee: <$25/mth
• 20% Down @ 5% Interest: $715/mth
• CAP-X: 5%
• Repairs and Mx: 5%
• Vacancy: 5%
• Property Management: 8%

Okay, now the talking part. This duplex is in a quiet, clean, coastal town. Very low crime rates (No violent crimes), decent schools, people still walk around and ride their bikes. The neighborhood is middle-income/blue collar. No gang activity. No derelict properties.

I'll show you the results based on the banks asking price and the offer price.

Banks Asking price results:

• Net monthly cash flow: $442
• Year 1 Cash ROI: 7.47%
• Year 1 NOI: $13,884
• IRR: 17.52%
• CAP RATE: 15.43%
• 2% Rule: Actually it's the 3.3% rule.

My Offer Price results:

• Net Monthly Cash Flow: $442
• Year 1 Cash ROI: 7.80%
• Year 1 NOI: $13,844
• IRR: 18.6%
• CAP RATE: 18.51%
• 2% Rule: Actually it's the 4% rule.

Okay, when I first started crunching these numbers and seeing all the positive trends, huge returns, and crazy equity, I started saying what you are right now. "No way, there's something wrong, when things seem to good they usually are." So I started double and triple checking things. I called multiple insurance agencies to get accurate quotes. I ran multiple scenarios at different interest rates, lower rents, higher CAP-X, etc, and the spread still kept looking good. So, after talking at length with multiple real estate agents, insurance agents, and a local investor/general contractor who will be performing the rehab. This property has tons of potential i believe. What do you think?

Marcus Auerbach · Answer

@Adam Scheetz you have mad two base assumptions that I would question.

Purchase price: Banks usually negotiate only 5% to max 10% from their asking price. I would be surprised if you get an AO for under 90k.

Second: Rehab cost - in my area a full rehab is usually somewhere between $40 and $50 per sqft. Problem with duplex is that you have all the expensive stuff twice - 2 kitchens, 2 bathrooms, 2 HVAC systems. Only one roof. And bedrooms are cheap.

Once you assume that your purchase price is 90k and your rehab is more like 70-100k the numbers start to look more realistic.

You have to assume that several hundred investors have looked at the property, many of them experienced and with deep pockets. That's what they do every day. What do they know that you don't? I would not buy anything that's in a FEMA flood plain, because I expect flood insurnace cost to rise (currently subsidized), which will cause retail value to drop.

Jennifer Petrillo · Answer

You say it needs a lot of work and then you say estimated rehab is $50,000. I would double that. Make a very detailed scope of work and nail down the costs as best you can, you will see your rehab number rise.

Angel M. · Answer

@Dennis M. haha ok...good luck to you, sir!

Dennis M. · Answer

Now Why would I say that ..so everyone on here can buy them up ?they are out there in the Midwest

Angel M. · Answer

@Dennis M. where are those 4% rentals?!

Adam Scheetz · Answer

***UPDATE***

It needs a complete and total rehab, down to the studs. As mentioned by other on the forums, a safe estimate of $100k or more is not out of the question for the rehab. The layout is actually pretty cool, but the scope of work is more than I'm able to handle at the moment.

Additionally, I stopped and spoke to a local Deputy to get his take on the area. He confirmed that it's not terrible. No gang activity. The majority of what he see's are drug related offenses in that area. Not that particular street, but in the area.

There is also some exterior work needed to boost the curb appeal. One thing I wasn't too fond of was the room sizes, they are a bit smaller than I like, but is also typical in these year homes in Jersey.

Though the equity is diminished by doubling the rehab cost, it's still there and the cash flow will still be possible, especially with a nice rehab. Just not something I can take a full bite of right now by myself.

Joe P. · Answer

What's this coastal town? My wife and I would love to invest in a coastal town but can't find anything at that price.

Kudos to you if the numbers pan out, but as you start tearing things down assume a much larger rehab budget than that.

Dennis M. · Answer

I have 4% rentals . I don’t think you do here for a few reasons . I’m sure for Jersey it’s all fine and good but Getting 220$ cashflow per door is nothing to jump up and dance about in my book . That property tax is astronomical btw

Adam Scheetz · Answer

@Marcus Auerbach Thank you for that info. Especially, the flood insurance thing. The last thing I need is the statement of work from the contractor. We will go walk through the property together. If the rehab cost goes up, as I suspect it will, there should still be some room for that.

@Jennifer Petrillo Hopefully, I can do that this weekend.

Thank you so much to both of you for your input!

@Jennifer Petrillo Hopefully, I can do that this weekend.

Thank you so much to both of you for your input!

Samantha Cash · Answer

I'm new to real estate investing, so I ran the numbers not only to check this deal but also to check the validity of the way I do these calculations (just NOI, cash flow and cap rate/ROI). I got similar numbers for all three, however just to clarify the terms. It was my understanding that Cap rate was NOI/purchase price and ROI incorporates financing. So, what I had labeled as Cap rate was your ROI. Regardless, this looks like a good deal. My cap/ROI was slightly higher, and cashflow was slightly less. It's also a great example of how a deal can work in an area with higher taxes.

4% Rule Duplex!! Tons of equity!! No way, right??

4% Rule Duplex!! Tons of equity!! No way, right??

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