Newbie in the middle of negotiating duplex, what do you think?

13 Replies

Hey this is my first post! I have been shopping for multi-familys (mostly duplexs) in my area for the past year. Recently, I made an offer on a duplex that I believed to be the best deal in my price range. Then I discovered BiggerPockets and started questioning my "deal."

We are still negotiating, but here is the offer I am sure I can get...

Purchase Price: 310K

2 units, 3 bd 2.5 bth, 1150 sq ft each unit w/ single attached garage.

Unit 1 rents for $995/month, Unit 2 rents for $1245/month ( Looking at comparable rentals, both units should be able to rent out for at least $1100(conservative), $1245 seems high to me. Current leases are through Dec/2014 and tenants want to stay). Anyways, lets assume $2200/month

I plan to do a conventional loan with 20% down. Est cash to close is about $67,000

Monthly Payment: $1250

Tax: $380/month

Insurance: $50/month

$1680 total, $2200 rent income (I know there are other expenses but these are the expenses that I can put a price and frequency on)


It is located 30 minutes from Seattle in a neighborhood I consider very nice for the price. The schools aren't rated very good, but the town is certainly growing. A mall was built in 2005 8 minutes from duplex. 2 years ago they started a major expansion project adding hundreds of shops and restaurants.

Based on other deals I see on this site it seems like this ones a ripoff. It is important for me to find a property with attached garages, in a quiet neighborhood off of busy streets, and with a back/front yard that's not small. This one meets all the criteria and its the only property in my price range that does. Most properties I see in my range either don't have garages, or are built in the early 1900s and need major updating. I've seen a few built in 1960-1980 but they are usually 2 bd/ 1bth and I prefer 3/2. Anything close to this property is either 400K+ or located in towns I consider "too far out there."

Should I be patient and wait for something better to show up? (I have been actively looking the last 6 months and this is the first home I have made an offer on)

Do I need to lower expectations for my price range?

Are prices just too high in my area? Do I need to start looking for something "too far out there?"

Thank you, any input is appreciated.


From a cash flow point of view, it's horrible. You'll lose money every month. Also, your closing costs look a little low. With 80% financing, and normal repair, maintain, vacancy, capitals expenditures, taxes, ins, etc. you'll need about 1% of the purchase price in monthly rent to break even.

$310K is way too much to pay for $2200 in rent, if cash flow is your goal.

@Roger Vi welcome to the site. & as others have said I would pass on this building. Out were I invest if i'm spending 300k i'm getting @ least $5,000/month

You have several strikes against you as far as cash flow is concerned. First, you are in an area where most people are renters, not buyers. One of the things that must mean is that rent is cheap compared to the cost of buying. It also may mean that the population is more transient.

Secondly, You are trying to buy a higher end property. Most properties around the country with high cash flow are those in the bottom half of the spectrum.

It looks like this property will provide negative cash flow. That is not necessarily bad if you can afford it and it otherwise is a good investment. The problem is that investment properties are valued based on cap rates. A duplex must be valued on cap rates and on comps. This would not be expected to appreciated at the rate of a SFH so without positive cash flow and little appreciation it would not be a good investment.

If you can I would advise investing in other areas of the county.

I wish you the best.

Bill

@Roger Vi

Welcome to BP. This is a great place to ask questions like the one you posted above.

I'd have only looked at that deal long enough to realize that the monthly rents are less than 1% of the asking price. And then moved on to my next deal analysis. Thus the "1% rule" in a nutshell.

Go find another deal and bring it back here. We love seeing as many of these as we can.

Happy Hunting!

@Roger Vi Welcome to BP!

I commend you for the wisdom in posting your question here. The answers discourage you from acting on this deal. I urge you to continue with your wise ways and listen to the advice. @Jon Holdman told me “There will always be deals.” That has helped me be patient and continue to look for a good deal. Hopefully one that passes the PB scrutiny test.

I wish you much success in you endeavors.

Pyrrha

thank you all for the replies! Looks like I'm back on the search, I will update if anything comes up.

Originally posted by @Bill Jacobsen :
You have several strikes against you as far as cash flow is concerned. First, you are in an area where most people are renters, not buyers. One of the things that must mean is that rent is cheap compared to the cost of buying. It also may mean that the population is more transient.

Secondly, You are trying to buy a higher end property. Most properties around the country with high cash flow are those in the bottom half of the spectrum.

It looks like this property will provide negative cash flow. That is not necessarily bad if you can afford it and it otherwise is a good investment. The problem is that investment properties are valued based on cap rates. A duplex must be valued on cap rates and on comps. This would not be expected to appreciated at the rate of a SFH so without positive cash flow and little appreciation it would not be a good investment.

If you can I would advise investing in other areas of the county.

I wish you the best.

Bill

Thanks for the response Bill. The loan I plan to use is based on me occupying one of the units in the property. I assume this means I'm stuck in my own area near my job. Any advice or suggestions on what I should look for in this scenario?

I have not done the math but I can see it's going to loose money, or barley scrape by. I would pass.

I invest where I can make the most money. In that vain I would suggest that you rent and then invest somewhere else.

The only other alternative I would suggest would be to buy a single family house and not invest right now.

Good Luck.

Bill

Just another thought before i leave this property... It may sound like I'm complaining in this post, but I just want to be sure it is time to leave this property alone. It really is the best I've found after 4 months of searching.

I want to say that cash flow is not my biggest concern as it is with most investors on this site. I plan to hold the property long term and see retirement income from it in 20+ years. With this in mind, I originally started shopping for single families as well as duplexes; I considered anything I could rent out for more than the monthly payment + tax + insurance to be "BREAK EVEN." In my mind, someone is paying my mortgage and I will own the building in the end. I realized there were other expenses to be paid (repairs/management/maintenance), so I started off assuming 10% of the rental income should cover this (set aside $220 out of the $2200 rent income each month for maintenance reserves). I realize this is a super low ratio compared to the 50% rule and other rules-of-thumbs on this site. The way I came up with this number is just based on repairs on my own single family home in the past 15 years and the expenses we have had in the past 2 years of renting it. I realize that home owners treat their homes better than renters, but I've always felt that if you can screen tenants carefully and you buy properties in the "higher-end," many of the misfortunes that landlords face can be avoided (i know im probably crazy for assuming this, i just want someone to confirm it).

Well that is a little insight into my "PRE-BIGGERPOCKETS" train of thought. In the past week I've learned A LOT reading through this forum and site. However, I just do not see myself finding a deal anywhere near the stuff I see on this forum. I see the deals of 100K purchase price with rental incomes of $2200+. It seems that in my market there is nothing under 200K and even the cheapest 200K properties need 60K+ in repairs/upgrades to get anywhere close to $2000 monthly income. I'm getting financed as owner occupant and with my job I am limited to properties nearby.

Wow I'm typing a lot so I'm going to wrap this up...

So recently I found this property at 310K. It was built in less than 10 years ago, is already fully occupied, and has NO major repairs needed in the near future (nothing can be predicted, but the condition of this house is 1000% better than most duplexs in my price range/area ). At first glance, all I noticed was that the rent income is $500 greater than the payment + tax + insurance. Tenant pays utilities and maintains yard. I understand problems will come up, but I will have $6000 a year to pay for this before having to dip into other funds. On top of that, the renters are paying my mortgage.

So I'm asking that someone give me a better reason to leave this property alone other than "there is no cash flow." I have a full time job and the most important thing from this property is to gain retirement income in 20+ years once the property is paid off. I am not looking to rehab any houses and I prefer to deal with tenants to want to live in "nicer" neighborhoods. I consider this neighborhood nicer than any other neighborhood in the area with a duplex. It is also the only duplex on a street with many well maintained single family homes. Unless I get tenants from hell, I do not see any damages that could happen to this property that could wipe out my $6000/year. Again, somebody please prove me wrong.

If you have made it this far you are a great person and I truly appreciate your time.

We buy class A. Single family homes as personal properties with as little to no down as possible. Therefore we only need $200-$300 for a property for is to be happy! That being. Said I think your margins are slim! I know we haven't bought a duplex because it just hasn't made sense! On the ther hand it depend ion your goal! Our houses don't follow biggerpockets "traditional rules" because of are area, living situation as goals!

If you want an area you can live with a tenant paying half or more this is an success! If you are looking for a pure nvedtrd by and this is all you are finding you might want to look somewhere else.

I manage everything ourselves! Have new ish homes and no vacancies! This has allowed us to make money off good margin! Again it's all based on your log term goals!

Originally posted by @Elizabeth C.:
We buy class A. Single family homes as personal properties with as little to no down as possible. Therefore we only need $200-$300 for a property for is to be happy! That being. Said I think your margins are slim! I know we haven't bought a duplex because it just hasn't made sense! On the ther hand it depend ion your goal! Our houses don't follow biggerpockets "traditional rules" because of are area, living situation as goals!

If you want an area you can live with a tenant paying half or more this is an success! If you are looking for a pure nvedtrd by and this is all you are finding you might want to look somewhere else.

I manage everything ourselves! Have new ish homes and no vacancies! This has allowed us to make money off good margin! Again it's all based on your log term goals!

Correction! Off of tight margin:!

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