Deal review for a duplex

[Rachit Puri]

I'm a new investor and looking for your opinion on a deal that got my attention.

Place: Houston

House: Duplex, 3bed 3bath 2000 sqft each unit. 

Price: 350k (slight room for negotiation)

Rent: tenant 1 is paying $1200 month to month lease and 2nd unit just got vacant. Market rate around that area is $1600

There is no upgrade required before I can rent the other unit. 

Questions:
1.  How easy it is to increase the rent in Houston? Tenant 1 is paying $1200 from past 2 yrs which is way under the market price.  

2. Once a tenant has month to month lease, can you convert it back to 1 year lease?
3. Even if I rent the other unit for $1600, it does not meet the 1% rule. So should I even consider this deal?

[Andrew Freed]

@Rachit Puri - Great questions, see my responses below:

1. I do not own in Texas or Houston so I cannot advise.

2. Normally when a tenant is month to month, you have the ability to raise rent within 30-60 days and set them up on a new lease so yes, you can convert them to a year lease.

3. Where interest rates are at, I would not consider a deal that cannot meet the 1% rule in the first 12 month months of ownership. Sometimes it takes time to stabalize a property and get the property to perform at max value, but if that max value does not exceed the 1% rule, I cannot see a property cash flowing at a 6 or 7% interest rate. That is just my buy box, but I do know other people that invest in expensive/highly appeciating markets like Boston and get no where near the 1% rule. Most of their plays are forced appreciation plays though. 

[Amika B.]

If you're not meeting the 1% rule (which should really be the 2% rule), and you have to really make a push to raise rents on an existing tenant, you might be getting yourself into a sticky situation especially as a new investor. Just a thought! Looks like you're really thinking ahead though which is a great way to analyze deals! 

I'm in the Houston area so please let me know if I can help in any way! 

[Rachit Puri]

Quote from @Andrew Freed:

@Rachit Puri - Great questions, see my responses below:

1. I do not own in Texas or Houston so I cannot advise.

2. Normally when a tenant is month to month, you have the ability to raise rent within 30-60 days and set them up on a new lease so yes, you can convert them to a year lease.

3. Where interest rates are at, I would not consider a deal that cannot meet the 1% rule in the first 12 month months of ownership. Sometimes it takes time to stabalize a property and get the property to perform at max value, but if that max value does not exceed the 1% rule, I cannot see a property cash flowing at a 6 or 7% interest rate. That is just my buy box, but I do know other people that invest in expensive/highly appeciating markets like Boston and get no where near the 1% rule. Most of their plays are forced appreciation plays though. 

Thanks Andrew for your honest opinion. I'm looking for cash flow for my first investment so that I feel comfortable and don't regret later and wait for property to appreciate. I studied in Boston and feels the real estate is really expensive there but could be wrong. My budget is 450k. If you have good deals around Boston, hit me up.

[Andrew Freed]

@Rachit Puri - I buy and own in Worcester MA, the second largest city in Mass and 45 min away from Boston. I find properties normally at the 1% rule here and it has the largest stock of multis out of any city in Massachusetts. To your point, it's impossible to find properties at or near the 1% rule near Boston but you can definitely find them in the western parts of Massachusetts. 

[Rachit Puri]

Quote from @Amika B.:

If you're not meeting the 1% rule (which should really be the 2% rule), and you have to really make a push to raise rents on an existing tenant, you might be getting yourself into a sticky situation especially as a new investor. Just a thought! Looks like you're really thinking ahead though which is a great way to analyze deals! 

I'm in the Houston area so please let me know if I can help in any way! 

Yes, I think raising rent to reach 1% is not a good idea.