Off-market duplex in 98418

8 Replies

Hi all,

Looking to make my first investment property deal, and a broker brought me an off-market deal in the 98418 area (east of Tacoma Mall). The place is a 3/1 (1850 sq ft) and 1/1 (1050 sq ft) currently, converted SFH--I can buy at $290k. He thinks it can rent for $2750 gross monthly rent (about $1750 on the 3/1, and $1000 on the 1/1), but it's currently renting for drastically less (current owner lives in VA).

I've also posted this in the deal advice forum here, but I'm hoping to get an opinion from locals on this part of town.  It's definitely not an "A" neighborhood--I'd call it a "C," but want to hear from others on this area.

Thanks.

I would go for it. Rents and values have been flying up and should continue to do so in the near future.

That's a great price. I'm not too familiar with the Tacoma neighborhoods, but I do know that east of the Tacoma Mall and especially on the east side of I-5, you're getting in that C to D neighborhood.

@Pete Mathias , the estimated rents appear high for that area. Unless the property is in exceptional condition or has extra amenities to justify higher than average rents, $2550 seems like a more realistic rental income estimate. When I estimate rents for properties that I help my clients acquire, I generally try to be conservative to set them up for success. People usually don't get mad if they end up making more money than I initially project. : ) 

This seems like a mediocre deal if you are looking for cash flow, however, the property appears to be in an area that is gentrifying and there are advantages to purchasing something mostly "turnkey" for your first deal. For example, it could be an easier property to learn how to self-manage allowing you to develop the skill sets required to be a good landlord. This will help you understand how to better manage your property manager down the road. 

At the end of the day, go back and look at your goals. If this property fits your criteria and helps you meet your goals, go for it! If not, keep looking.  

Aaron Nelson, Real Estate Agent in Washington (#127645)

@Nate Burgher @Seth Borman  Thanks for the responses, appreciate the insight.

@Aaron Nelson   The inside of this property has some good character (de-cluttering and re-painting will likely do wonders), and I think the broker is figuring the large sq footage will command a premium vs other similar 3/1 & 1/1.  However, my concern is whether the neighborhood will deter the right kind of tenants.  For example--if a potential tenant could afford to pay that premium, would they rather live in a different part of town, even if that means less space/character to the unit.

I realize some of these are rhetorical questions, just asking out loud.

Thanks.

@Pete Mathias , have you talked to your realtor? Do they know the neighborhoods well? What about Trulia.com and their crime map? Does Trulia pull the information from Tacoma PD? What about calling Tacoma PD and asking about that area? 

Just some ideas. Sounds like the neighborhood is your big concern, so find a way to get your answers :)

@Pete Mathias - I checked out this and the deal analysis thread and there are two things I would look at. 

1) The neighborhood. That part of South Tacoma is appreciating and improving, but from everything I have seen is less attractive, and therefore not getting top rents for unit improvements as other neighborhoods (e.g. Hilltop, Proctor, etc.). That said, some of the blocks that are developing better neighborhood amenities could be a good bet as the neighborhoods I mentioned are getting harder to find deals. I've been to a few properties in that Zip that were too far away from amenities and weren't deals for me based upon comp rents.

2) Legal duplex and utilities - my understanding in Tacoma is legal duplexes will be classified by the Assessor as a duplex and will be separate metered by Tacoma Power (each unit with it's own meter). There are a few considerations there. You will typically pay slightly higher interest on a duplex than an SF depending on your lender. If you are not separately metered you have a bit of a challenge with utilities. If you pay utilities as the LL it will kill your cash flow.

To pass them through to tenants it is best to separately meter them. You probably don't want to mess with getting a new utility meter in unless you are doing a legal (and potentially expensive) conversion from SF to MF. In that case you need a sub meter on the electric, water, and gas (if present). Electric is getting cheaper to sub-meter, and water isn't too horrible. If the house was SF, the question is whether it is setup so that you can sub meter effectively Same goes for the plumbing... You've got some capital cost to get there. Also think hard about getting meters that will report via the internet or a cell signal to avoid having to have them read (unless you have Prop Mgt. willing to do that bi-monthly). 

I see a lot of properties that are being rented as individual units without being legal duplexes. I usually am most concerned about the metering situation. I think buying as a SF isn't a deal breaker because of the interest rate and eventually having the exit path of rehabbing back to an SF and selling retail. I think that making tenants pay utilities without having separate meters creates some risk when you get in a rent dispute with a tenant down the road.

Hey @Pete Mathias - fellow Tacoma investor here - specifically in MFH. Biggest red flag for me is what he thinks he can rent it at - that will never happen in that neighborhood. I think you'd be looking at $1500-1700 on the 3/1 - and maybe $750-900 on the 1/1 - this time of year in particular. Can you put in an offer for less to make the cash flow more attractive? Have you rented/been a landlord for a C class tenant before? Last question: how did you meet this broker? Best of luck to you.

@Christen G. Thanks for the feedback, Christen.

I decided to pass on this property for a variety of reasons, which I'll spell out here.  Feel free to analyze and comment on whether it makes sense or not.

1. After finding a new financial advisor, I've decided to restructure a lot of my holdings to set myself up better for real estate investing, life insurance, etc. This includes using a whole life insurance policy that we can get a LOC against for buying homes at a decent rate. Figured it would be best to do this before starting to tie up properties.

2. The permitting issues on the house are still unclear to me and I don't want to step into something like that on my first property. I'd rather pass on a good deal than buy a lemon starting out.

3. I'm not sure if this property aligns with my goals of focusing on cash flow vs appreciation.  My conservative numbers showed a positive cash flow, but the age of the unit (even with major upgrades) still has me wondering and one big ticket item could wipe out the cash flow easily.

4. Seems to violate the rule of "buy a C home in a B neighborhood."  This one seems to be the reverse, in my opinion.

5. Not confident we could get those rental prices, as noted. I talked to a PM who works in that area, and he suggested dropping the $2750 down to around $2500-$2550 (gross on both) to attract better tenants.

As to how I met the broker, he's an investor in the area (along w/ Spokane and a few other areas); I was introduced to him by another investor who focuses on apartment complexes (and is a BP member, whom I met on here).  He has exclusive option on that property via a wholesaler for about a week; the $290k price includes the wholesalers markup and his 3% fee.  My understanding is that price was non-negotiable at this point (maybe that'd change if they open it up to others and no biters).

Thanks all for the feedback!

Join the Largest Real Estate Investing Community

Basic membership is free, forever.