Duplex Evaluation

16 Replies

I am a beginner investor in Charleston, SC. Looking to Buy and Hold properties for cash flow. Currently have made an offer on a duplex for around $110K. There are a few sticking points that I have and I was hoping for constructive criticism or advice.

The duplex was originally listed for $120K and we have negotiated the seller down to $109.5K and the seller is to pay 3% of closing costs. I believe I can rent both units for around $710 per month each. $109.5K is the exact price the duplex next door sold for in 2013 so it is comparable.

One unit is lived in by the owner. She has asked as part of the sales contract to live in the unit for six months at a rate of $600/month.

The other unit has a tenant until June 2014 and is renting at a reduced rate of $650 per month because the homeowner knows the tenant. Additionally, the tenant had a lower than normal security deposit of $350 because they painted the entire unit (it does look pretty good).

The third issue is the homeowner had the fireplaces removed. I do not know if the comparable had the fireplaces removed or now.

Should I pull the trigger? Subtracting expected expenses I hope to be cash flowing about $200/month

I don't see a huge upside, it sounds like $109,500 is market. I doesn't sound risky (although I'm always nervous when a landlord gives a tenant a break on rent/depoait to do work), but I think you can do better.

@Tim C. this one is a "maybe."

What should the rents be? Is there any chance of getting the place vacant?

I would find out exactly how much the following expense are going to cost you each month. If you post those numbers here, I'll tell you what I would pay for the property.

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. 8% represents 1 vacant month/unit/year

I'd negotiate the price down a little more as part of the 6 month deal. Typically duplexes you should be able to do at least 20-30% ROI on paper (it's always less when repairs come up in real life).

Wait, You can buy a duplex for $109.5k that will gross $1420/mo and you think you'll only cash flow $200? Even if financed 100% at 5% you would still have a little less than $600/mo P&I. Where is the other $800 per mo going? And in Charleston? I think a cash flow+ property in Charleston is a good bet in this current market unless there's some glaring deficiency in the property.

I might have an interested party if you're not going for it....

I used the 50% rule to estimate initial expenses and the actual expenses pretty much match that. Yes financing will be $600/mo with expenses (and reserves) at round $700/mo that puts us at a cash flow of $100-200/month.

Tim

@Tim C.

Now that it passes the 50%, time to dig into the actual numbers. I listed the ones I use above. If you dig up each of those numbers and verify them, you should have a good understanding of how good/bad the deal really is.

Have you thought about putting hard numbers to your investments?

I use $100/door/month cash flow AND 15% cash on cash return for 2-4 units builds. $150/door/month cash flow AND 15% cash on cash return for SFH.

Those numbers give me an exact place I want to put in my offer.

Tim,

It sounds like an OK deal (not great but not bad either). It will be better obviously if you can get the market rents of $700/month. How long is the lease of the owner's friend? Get the complete lease document of the friend to be sure the $650/month rent is in writing. Also, if I were you, I will do an ACH where the tenants will allow you to automatically withdraw from their bank accounts.

I attached the screen shot of my excel spreadsheet for evaluating multi-family. I am assuming there are no other expenses...

@Wendell De Guzman : where did you get your spread sheet. Its has a much nicer layout then the one I have. Wondering if I can get a hold of that one

I guess you must have some expenses in there that I'm not imagining. I wouldn't expect more than $250 - $300/mo going out in taxes and ins. That would leave $4800+/yr to cover anything else. Is it a high maintenance building? Is the flood ins exorbitantly high?

I admit, I haven't learned the 50% rule and just go by the numbers on each individual property so it makes a difference as to what condition the property is in now (how new mechanicals, roof, windows, appliances, etc). Still I think it's hard to find a deal that good in Charleston (where you can reasonably consider rising values as an investment incentive.)

I'm helping a client buy a $175k (after renovations) townhouse downtown in which she will see $2000+per mo gross rent and she's happy. I'm buying a $100k (after renovations) James Island townhouse and expect only $1000 gross rent but based on past sales I believe I can re-sell it for a $30k profit if I choose. I may hold it even if it's barely cash flow+ as I expect values to rise.

The deal seems like a great buy to me...I don't think you need to have a property management company (especially if you're just starting out). If the furnace goes it'll run you less than 1 months rent. If the water heater goes it'll run you about 1/2 of 1 months rent. I can't see holding more than 1 months rent for your maintenance costs. If you're saying these are under market rate rents currently, then you also won't have vacancy, but I accounted for it anyway.

The Deal:

Rent = $15,000
Vacancy = -$1,250 (1 months rent)
Taxes = -$1,900
Insurance = -$1,000
Maintenance = -$1,250 (1 months rent)

-----------------------------

NOI = $9,600
Debt Service = $5,643.07 (20% downpayment, 30 year am, 5% int)
Cash Flow = $3,956.93
Cash on Cash Return = 15.08%
DSCR = 1.70x

Thanks for the feedback. I should have it under contract tomorrow. Interesting to see the wide variety of deal evaluations from poor to good.

John - thanks for the market insight. I am still working on my characterization of each surrounding area to define which neighborhoods are growth and which ones lack rentals (and thus need me to place a few).

@Wendell De Guzman

Please message me if you are willing to share your spreadsheet. Your details are hidden so I can't email you, at least with this app. Thanks

@Tim C

did you get that Duplex?? Update us on the performance 

Thanks for your detailed response. What is the rationale for including Mgmt Fee if you are going to self manage?

Originally posted by @Aaron Montague :

@Tim C. this one is a "maybe."

What should the rents be? Is there any chance of getting the place vacant?

I would find out exactly how much the following expense are going to cost you each month. If you post those numbers here, I'll tell you what I would pay for the property.

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. 8% represents 1 vacant month/unit/year

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