What's Your Max Offer on This Duplex?

Real Estate Deal Analysis & Advice
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What's Your Max Offer on This Duplex?

Mark S.Pro Member
Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes

Duplex.  15 years old.  2BR/1.5BA units.  900 sq ft each.  Area = C class.

Rents: $500/unit for $1,000/month gross.
TOTAL INCOME: $1,000/mo

Expenses:
Taxes = $55/mo
Insurance = $75/mo
Prop Mgmt = $100/mo
Cap-Ex = $100/mo
Ongoing Maint = $100/mo
Vacancy Loss at 8% = $80/mo
TOTAL EXPENSES: $410/mo

(I will likely finance: 20% down, 5.25% max interest rate for 30 yrs, P&I = $250/mo)

Closing Costs: $5,000
Estimated Repairs: $5,000 (going to visit property shortly, but like to start with $5k).

What's your max offer?  What do you think of this deal?  Thanks in advance.

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John Van UytvenPro Member
Property Manager · Oconee, IL · Member since 2014 · 536 posts · 202 votes
12y

Let me show you some of the problems I see with your situation.

You don't say what city this is in.  We don't know what the other duplexes rent for or sell for.

Is the rent low?  Could you fix it, and add value and get more for rent?

You are also going for an easy vacancy rate, 10% is standard, run it at 12% and run your numbers again.  My partner wants us to run theoretical vacancy on a 8 unit, at 25% to see how our number look then.    

Your information is incomplete.

But if you are a fan of the 2% rule.  Then you should pay between $45,000 and $50,000.

If you adhere to the 1% rule, then $100,000.

Keep us updated on how your deal progresses.

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  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    12y

    $60k max offer.  

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  • John Van UytvenPro Member
    Property Manager · Oconee, IL · Member since 2014 · 536 posts · 202 votes
    12y

    Let me show you some of the problems I see with your situation.

    You don't say what city this is in.  We don't know what the other duplexes rent for or sell for.

    Is the rent low?  Could you fix it, and add value and get more for rent?

    You are also going for an easy vacancy rate, 10% is standard, run it at 12% and run your numbers again.  My partner wants us to run theoretical vacancy on a 8 unit, at 25% to see how our number look then.    

    Your information is incomplete.

    But if you are a fan of the 2% rule.  Then you should pay between $45,000 and $50,000.

    If you adhere to the 1% rule, then $100,000.

    Keep us updated on how your deal progresses.

    1Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    Curt Davis , thank you. John Van Uytven , I purposely didn't list the city. Might sound crazy, but every time I put a deal analysis up, the property in question goes from no one else offering to a multiple offer situation. Maybe I'm being paranoid and it's completely a coincidence, but I'm trying to grab my first rental property and certainly don't want to encourage others in my area to step on my toes with this deal. With that said, rents are about market rents. I still haven't stepped foot in the property yet, but let's assume I add little to no value and pretty much do some minor cosmetic rehab to get it rent ready.
    0Reply
  • Andrew Whicker
    Investor · Ogden, UT · Member since 2014 · 98 posts · 10 votes
    12y

    This is the same thing I'm running into, finding out what I want my goals to be.

    It's easy to be inconsistent, as different investors do different things.  Some build up cash reserves with 0% cashflow for a while and then cashflow 100% until an expense comes up. 

    This site seems to keep it simple:  Every expense is made every month, the % cashflow stays the same every month.  

    Anyway, after looking around and talking to people I've come up with $100 / door min. + 15% CoC min. Interested to see what other people say. It seems with my calc's, that's $65k max with $16k max to spend (including down payment / closing cost / repair / inspection / etc) before it gets 100% occupied assuming tenants pay 100% utilities, you set aside 15% maintenance per month and 5.25% interest. (1.5% rent / purchase ratio, $280 / month cashflow).

    Don't take my word for it though, I'm putting in offers for my first still.  I'm pulling my hair out, so I'm curious what seasoned investors tell you.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y

    @Andrew Whicker , thanks, man, for the input.  I basically told myself I'd settle for a minimum of $100/door and 10% Cash-on-Cash.  This deal seems quite a bit better than that, depending on the purchase price.  I'll keep everyone posted and I'll also stay tuned to read other feedback.

    1Reply
  • Andrew Whicker
    Investor · Ogden, UT · Member since 2014 · 98 posts · 10 votes
    12y

    just know that I haven't bought a property yet

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y

    Well, maybe you should change your title.  ;-)

    1Reply
  • Alan Houghton
    Chicago, IL · Member since 2014 · 3 posts · 0 votes
    12y

    Using your numbers and your 5K repair estimate, I think 88K puts you at just over 100/door, while 83K puts you at just over 10% cash on cash by my calculations. 

    If you assume 45% for overall costs including vacancies, etc., your top price drops by about 10K for the 100/door measure to 79K and 76K for 10% cash on cash.

    Looks like you have some room to move here.  I would probably do my limit based on how I like the neighborhood and the likelihood of some good appreciation, rent growth and how much hassle it is likely to be.

    by the way, are you calculating a different rate on your mortgage, I'm coming up with 335/month for 20% down and 5.25?

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y

    That's probably because I'm planning to purchase this thing for under $60K.  Sounds like a huge green light so far.

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  • Pat L.
    Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
    12y

    I watched a large 3/2 per unit duplex, in a 'B' area, drop from $89k to $59k over 18 months. The tenants ($675/mo/unit, sep utilities except H2O) moved out 6 months into the listing anticipating a new landlord. It did need a lot of work, & was a cash only offer.

    We got it for $45k & re-sold it in the high $60's without doing anything to it. 

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  • Engelo RumoraBusiness Member
    Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
    12y
    Originally posted by @Mark S.:

    Duplex.  15 years old.  2BR/1.5BA units.  900 sq ft each.  Area = C class.

    Rents: $500/unit for $1,000/month gross.
    TOTAL INCOME: $1,000/mo

    Expenses:
    Taxes = $55/mo
    Insurance = $75/mo
    Prop Mgmt = $100/mo
    Cap-Ex = $100/mo
    Ongoing Maint = $100/mo
    Vacancy Loss at 8% = $80/mo
    TOTAL EXPENSES: $410/mo

    (I will likely finance: 20% down, 5.25% max interest rate for 30 yrs, P&I = $250/mo)

    Closing Costs: $5,000
    Estimated Repairs: $5,000 (going to visit property shortly, but like to start with $5k).

    What's your max offer?  What do you think of this deal?  Thanks in advance.

    Hi Mark,

    Depending on the exact area but C and D class here in Toledo would go for around $15,000 - $20,000.

    They might be a bit rougher and would need more than $5,000 in renovations.

    Thanks and have a great day.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    Pat L. , nice work. Engelo Rumora , thanks. There's no way this would sell that low, unfortunately. I've offered on similar deals at about 70-75% of asking and got beat every time.
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  • Engelo RumoraBusiness Member
    Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
    12y
    Originally posted by @Mark S.:

    Pat L. , nice work.

    Engelo Rumora , thanks. There's no way this would sell that low, unfortunately. I've offered on similar deals at about 70-75% of asking and got beat every time.

    No prob Mark,

    Its prob in a more desirable and larger city.

    I'm just about to close on this for $23,000 -

    http://www.trulia.com/homes/Ohio/Toledo/sold/14441...

    Needs some work but tenanted for a combined $1,500 per month.

    I would consider the area C class for now. Its in the Old West End where there are many renovated character style homes just around the corner. They sell for mid to low $100,000.

    Bought this pretty cheap :)

    Have a great day.

    Podcast Guest on Show #89
    Oz Realty4.5367 Reviews
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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    Engelo Rumora , that's awesome. How in the world are you getting $1,500/month rent? Maybe a better question is how in the world are you able to buy that for only $23,000? Any competition or other offers? How much work does it need? Dang!
    0Reply
  • Matt Mason
    Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
    12y

    @Mark S. 

    I really think the vacancy is probably too low for a C class in the middle of the country unless you are in a market that has a really low vacancy, which is not typical.  Also, if you are using property management, they will charge you a lease fee for releasing.  Finally, you'd want to capture eviction costs here.  In a C class you should at least plan for some.

    Others with more experience in this type of investment in this general area of the country can comment and add more, but that is how I would underwrite it.

    0Reply
  • Brandon Bohland
    Toledo, OH · Member since 2014 · 26 posts · 3 votes
    12y

    Hi Mark,

    You're right, it really doesn't matter what city it's in.  My thoughts are that as long as you're cash flowing $200-$300/month, you're in great shape for the long-term.  You're in even better shape if you recycle that income back into paying down that mortgage faster, or building up a reserve for the next down payment.  

    My rule is to multiply your total monthly income by 50 and that should be your total, all-in cost.  So if you have repairs that need done right away in order to get the $1,000/month ($5k in this example), the total purchase price should be $45k.  If you don't think any repairs are needed right now and you can still get the $1k/month, you should be willing to go up to $50k then build your capital reserve.

    This rule of thumb works in a lot of cities across the US.  They usually have the benefit of appreciating over time as well.  Anything more than the 2% rule (3% and above) seems to not have the appreciation benefit (GENERALLY speaking).  Of course there are always those behind the scenes deals that you can find to capture all of the above.

    Good Luck! -Brandon

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    Brandon Bohland , I've never heard of the multiply your rent by 50 method before. I guess that's similar to the 2% rule, but different way to calculate it. Very neat. Thanks for sharing your thoughts. Much appreciated.
    0Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    Matt Mason , I have re-run my numbers with 12% vacancy and they still look acceptable with a purchase price in the low to mid 50Ks.
    0Reply
  • Engelo RumoraBusiness Member
    Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes
    12y
    Originally posted by @Mark S.:

    Engelo Rumora , that's awesome. How in the world are you getting $1,500/month rent? Maybe a better question is how in the world are you able to buy that for only $23,000? Any competition or other offers? How much work does it need? Dang!

    lollol

    Thanks Mark,

    I don't want to post too many links to the blogs I wrote for Bigger Pockets but when you have time, check out a few :)

    3 of the units are renovated but one needs a full renovation. Need to paint the outside and a few minor repairs in the basement.

    The seller wanted out due to moving the funds into another commercial project he has going. We are also buying a few others from the same seller. He paid $65,000 for this one a while back.

    I would say its prob worth around the $50,000 range today and in the current condition.

    No competition as the seller saw our branded "We Really Do Buy Houses" car and called us direct lol

    One of the biggest mistakes I made when starting was buying just for the sake of buying. There are so many great deals out there you just have to be patient and ready to pounce as soon as that big one $$$ comes along. This deal is very decent.

    Working on another one right now which is even bigger. Hoping to pick it up around $30,000, spend $5,000 - $10,000 on renovation and walk out the door price is $100,000.

    Two recent comps sold for $126,000 and $122,000.

    Thanks for reading and have a great day.

    Podcast Guest on Show #89
    Oz Realty4.5367 Reviews
    WebsiteView Page
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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    I went to see this property today and most repairs seem to be cosmetic - flooring, paint, etc., with one exception: bathroom tub leaking issues. In both units, the bathroom tubs leaked through to ceiling below and the downstairs showed water stains. It was a minor 12" stain in one of the units. The other unit had major stains of at least 2' in diameter and the ceiling was sagging down. It's not the roof, because the upstairs ceilings were fine. I have no idea what it'd take to fix this and whether it would take an entire bathroom remodel or what. To my untrained eye, I'm completely guessing at about a $10,000 rehab for both units in total. I was able to talk to some of the neighbors and got a generally good vibe about the people living there. I liked that the two tenants I talked to were relatively long term - one was 10 years and one was 3 years. Most others in that area (there are 4 duplexes total for 8 units that all back up to each other) have been there for quite some time, including a tenant of 15 years! These people definitely seemed like most were on some sort of assistance, except maybe the girl who's a manager at McDonalds. There are maybe 3 units with families/kids. The one bad thing one neighbor told me was about people that moved into a SFR across the street from the duplex I'm considering about a year ago and may be dealing drugs. They said there's sporadic traffic in/out and that they sometimes park behind the duplexes. Even with that, though, they said it's not constant and they generally feel safe. These were two older women I talked to. One of the women even said if I bought it and wanted to give her my number, she'd call me if she saw anything fishy going on. That made me feel pretty good. Sounds line they really watch out for each other there. The duplex I'm considering is right near downtown and some small businesses (dry cleaners, restaurant, gas station, grocery store, etc.). QUESTIONS: 1.) Do the drugs automatically scare you away? 2.) Do you simply drop your offer by the estimated $10,000? 3.) Would you walk away because of the bathroom tub / ceiling issues? Any advice is greatly appreciated.
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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    Matt Mason Engelo Rumora Pat L. Andrew Whicker Curt Davis John Van Uytven Alan Houghton Brandon Bohland
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  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    12y

    Take the current gross rent, $12,000 per year and divide by the lowest rate of return acceptable to you for the area. For me, 20%. 12,000 / .20 is $60,000. That is my max offer. Of course a lot of other factors would reduce that offer based on the condition, location, appreciation, etc.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    Anthony Dooley , thanks for responding. So you use gross rents as a return figure to arrive at a Max offer price? That's interesting. What about all the operating expenses? 20% is great, but I would certainly settle for less.
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  • Anthony Dooley
    Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
    12y

    The exact expenses vary, so 20% covers unexpected expenses and still gets close to 16% net. I don't know why people rack their brains trying to figure every possible expense. They are only guessing and they are shooting for a 10% cap rate. 10% cap rate is not worth the trouble unless it is a high end property, which I don't buy because of the low return of cash flow. I have some rental properties returning 30% of gross rents. If you rehab the property, your repairs should be minimal for a few years. Shop around for the best insurance rates. Taxes, you can't do anything about. Good luck on you purchase.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    I made an offer: $48,025. Just got word that there are multiple offers and I need to submit highest and best. Debating on whether or not to go up. Asking is mid 50Ks.
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