First Duplex-Need Help with Eval

10 Replies

I am looking at purchasing my first property as a buy and hold. My realtor has a duplex in a suburb of Minneapolis that he's going to list at $259,900. It's not on the market yet as he's given me first dibs.

Here are the details:

-Asking $259,900, but I'd like to get it for 250K

-Currently has one side occupied by a renter. Rent is $1150 per month. Other side is vacant now. I think I could get $1150 for both sides for a total monthly rent of $2300.

-I'd put 25% down and finance 187,500. Not sure the percentage, maybe 5%? At 5%, P/I=$1007/ mo

-Other expenses:

Taxes=$340/ mo

Insurance=$150/mo (estimate)

Vacancy=$192/mo (8%)

Management= $230/mo (10%). I live out of state so this is necessary.

Upkeep and repairs=$100/mo. This is an estimate. Maybe too low? I'd probably have the tenants take care of snow, but hire out the lawn care. Units seem to be in good shape.

Cash low=$281/ mo; $3372/year.

ROI= 5.3%

CAP Rate= 6.1%

I know it's not great, but for my first one, it looks promising to me. So, what does the crowd say?

If only for cash flow, you can get better deals by buying two townhouses in suburbs. And for price appreciation, the value of duplex varies A LOT depending on where it is located in Minneapolis. Your realtor needs to be very trusthworthy, or you need to look at a lots of comparables yourselves.

yes, Robert, in what suburb is this? You can pm me for privacy. I have a duplex in the north metro I'd he happy to sell you for $230k with similar rents in place :) I'm happy to give insight as I can on the particular market.

Gross Annual Rent: $27,600

Annual Expenses: $12,144
Annual NOI: $15,456

Annual Debt Service: $12,079 (25% down, 5%, interest rate, & 30 yr)

That gives you a debt service coverage ratio of 1.28. Most lenders want to see a 1.25+ so, you're good in that department. I'm a bit anal regarding numbers; so, I'd personally try to get a better estimate on those expense numbers. I'm sure some other investors on BB could post their experiences or you could start calling some of the management companies in the area. Ask them in the process what normal expenses are in the area.

Just my two cents. Good luck.

Thanks for the quick replies! And for the advice. Very helpful so far.

I think your repair estimate is far too low. Additionally for your first time why go out of state? If it's your 1st time your risk is already high and adding to it by not being close enuf to oversee just expands that risk.

Hi Robert,

Personally, I would stay away from this one. I am not sure how familiar you are with some of the rules that Brandon Turner has laid out on this site but a couple of them are the 1% rule and the 2% rule. I think that at a bare minimum, any investment property that is bought for cash flow, should have monthly gross rents that are 1% of the purchase price + capital expenses, which this duplex isn't even earning (i.e. $2,300 in rents is less than 1% of $250K). I am not that familiar with the Minneapolis market, but I would think that Wendy is right in that you would be able to buy SFHs in Minneapolis that cash flow better.

Also - your projections of repairs and maintenance are low. There will be things that come up like replacing the roof, water heater, furnace, A/C unit, etc. that will make your maintenance costs average much more than $100 a month.

Seems too high, not enough margin of safey if things go awry. Being that you're out of state, you will depend on third party for all of the repairs so that repair budget needs to be increased. Not to mention, you will need to pay a commission for your realtor to find a tenant. Also, is this house sub metered for water? Also, I would verify those rents. How does those rents compare to the market average? Do a quick rent-o-meter and craigs list sampling of rents in the area.

Hey @Robert Fuhs here is what I get when I run it through the BiggerPockets Rental Property Calculator:

Basically, I used 5% for repairs and 5% for CapEx, which you should definitely plan for. I also used 12% for property management because, although they may charge 10%, they charge fees when a unit is rented out, so it will probably work out more toward 12%.

Also important - I did not notice any Water/Sewer/ Garbage. Is this all Tenant-paid? If not, that makes it even worse. That would make a negative cash flow property.

Total Cash on Cash return on this ends up being 1.99%. That's almost as bad a CD at the bank. Probably not worth the risk.

So my opinion: unless you expect some massive appreciation with this thing (I doubt it) I would pass.


Thoughts?

Medium fbprofileBrandon Turner, BiggerPockets | http://www.BiggerPockets.com | Podcast Guest on Show #92

@Brandon Turner Thanks for all that helpful info! What a great tool. Yes, it doesn't look like this would be a good deal at $250K. I wouldn't expect big appreciation either.

I'm slowly discovering that finding good deals might be hard to do. Not that I thought it wouldn't take work, but it seems that you need to find things that are sort of bargain priced.

@Travis Christl I am looking out of state because I live in the OC and can't afford property here. I used to live in the TC and am pretty familiar with the area and do get back there once in a while.

Thanks again for the helpful info. A business partner and a potential property manager went to look at the place today and I got a good report. It could even be turned into a 3 bedroom pretty easily they tell me.

My question is, is there a way to figure out at what point it would make sense? Ie, what price do I need to get this for in order for it to cash flow properly? Is there a simple way to figure that out?