Duplex Purchase - should I pull the plug on the deal?

21 Replies

We've been looking for another duplex for a year, and haven't found one that works for us. We finally found one, are in contract, and received some new info today that has me ready to pull the plug. Would like some advice.

Location: Delaware, OH (north of Columbus - lots of commuters to the big city for work). As far as apartments go, nearly everything is a complex - limited availability of duplexes around the city. Between 2000-2012, the population grew by 43%.

Purchase price: 129,000

Rent: 675 + 650 (1325/month)

Down payment: 32,250

Bank financing: 96,750 @4.375

Payment: 483.06

Taxes: 216/month

Insurance: 66/month

Property management: 0 (we self-manage)

Vacancy/Repairs (15%): 198/month

Utilities: $170/month! This is our new information. The MLS ad said tenants pay utilities, it turns out that the landlord pays water, and we just obtained this figure a few minutes ago. This is a huge hit to my numbers.

Cashflow: $164 (this is the number I always focus on)

50% rule: $75/door/month 

2% rule: 1%

I would get the water metered out separately for ~$500. I'd probably drop their rents by $25/each, and make them pay the water (I'd still be ahead $120/month). I'd also do it on a month-to-month, and re-add the $25 next summer. 

Losing the water bill and dropping the rent a bit puts me at:

Cashflow: $292

50% rule: $65/month

2% rule: .94%

The property is in fantastic shape - we'd need no immediate work on it. Tenants mow the grass. I'd call it a B or B- neighborhood. The rents are right in the middle of market rate. This would be an easy place to keep rented, and maintain (I included repair costs/capex at 10%, but my husband also does all the maintenance/repairs, short of new roofs/furnaces)

I can probably talk the seller down a few thousand based on this new info - maybe $125k. 

Advice appreciated!

Thanks!

Pam

Knowing the area. I say you get into it, upgrade the units a little and raise the rents. I would consider these A|- at the worst.

What's common for water in the area? Do other tenants pay for their water, or is it expected that the landlord covers that in Delaware? I haven't ventured that far north.

Knowing Pam, her units are metered individually....or they will be. She is the master of that and we should all take note!

Side note, next Meetup Sept 8th.

Special guest Ben Leybovich!

Hope you guys can make it,

Steve

This does not sound like a deal to me. Here's my analysis:

Current rents: $1325. 

Current expenses: $1133.06 (PITI + vacancy + utilities). Yes, you are doing the property management yourself, but you have to assign some value to that. Your time is worth something and you're deluding yourself by assigning zero dollars to it. So, let's go with 10%, which is below the market rate.

That puts your cash flow at just around $60 without taking into account any repairs. That's basically a negative cash flow property. 

The long and short of it is the 50% rule doesn't work for this property because the operating expenses are way too high, more like 63% without repairs and over 70% when taking into account repairs. And that's operating expenses i.e. debt service is not being taken into account.

Now, you can do the metering separately, but you're taking on more risk there. It's hard to say how much rent the market will bear by doing that and knocking off a few thousand dollars just doesn't seem an adequate risk to reward ratio. There should be a very significant discount on the originally negotiated price based on this new information that has been revealed to you. Otherwise, it's not a deal. 

Andy - I appreciate the feedback and risk/reward analysis. I'm running more numbers based upon your insights.

I don't agree with you on the PM piece of things, although I think I know where you're coming from. In our business model, the hubby is the PM so we don't have to pay someone to do that. Yes, his time is worth something - in the case of an investment property, it's worth the cash flow we obtain by not hiring a PM, and the ongoing equity we gain in a long-term investment. So I don't count the 10% as an expense.

Corey - as far as people paying their own water in Delaware, that is not unusual. All of my tenants pay their own water, with their own meters. The market rent is $625-$700 +utilities in this area, and these apartments have both a fireplace and a garage, so I can get the higher end of that.

Steve - I'll try to make the next meetup! Thanks for the kind words - yes, I'm all about separate metering. I couldn't do it any other way. I don't like paying someone's utilities.

I would not touch this property.  There is no upside.  Even as you pay down the mortgage all your other expenses will be going up.  Even with the mortgage paid off in 30 years you'll be using that money to pay for updates and increasing repairs and maintenance no matter who is doing them.

@Pam R.  I agree with you on the PM fees.  We self manage 4 rentals and it takes very little of our time for a good property.  Occasionally we have to manage a repair but that is usually not a big deal.  

We have friends who moved out of state and they self manage as total newbies, we list on MLS for them and send them the contracts for e-signature. Occasionally they will call us and ask for a vender referral but the home is newer and takes little maintenance.

Is this the only property you ever intend to buy? If you are serious about a portfolio, eventually you cannot self manage them all. Also, what happens if you have to move? Or hubby (god forbid) has health issues that stops him from doing the PM? PM and Maintenance is a cost. Even if you do it yourself for awhile, its still a cost. The deal is thin. Do you expect appreciation? Less likely for a duplex I would assume (but I don't know the area).

horrible investment

the numbers are too thin on thus one. I say walk away

@Andy Argonaut   Thanks for mentioning the value of our time. That is something I have not done with previous rentals. I think if any of us want to move forward in a bigger way, it is critical we put a value on our time. I need to keep seeing this, thanks again.

Originally posted by @ANISH TOLIA:

Is this the only property you ever intend to buy? If you are serious about a portfolio, eventually you cannot self manage them all. Also, what happens if you have to move? Or hubby (god forbid) has health issues that stops him from doing the PM? PM and Maintenance is a cost. Even if you do it yourself for awhile, its still a cost. The deal is thin. Do you expect appreciation? Less likely for a duplex I would assume (but I don't know the area).

 Anish, I was thinking along the lines of appreciation as well. To me, I would need a pretty good idea of at least high single digit appreciation for the next several years on this property for it to work.

Originally posted by @ANISH TOLIA:

Is this the only property you ever intend to buy? If you are serious about a portfolio, eventually you cannot self manage them all. Also, what happens if you have to move? Or hubby (god forbid) has health issues that stops him from doing the PM? PM and Maintenance is a cost. Even if you do it yourself for awhile, its still a cost. The deal is thin. Do you expect appreciation? Less likely for a duplex I would assume (but I don't know the area).

I agree 100%, if the numbers are break even or worse after hypothetically hiring a PM, then it is too tight. There are much better deals out there, even on the MLS. From what I see every day in Columbus this price is high and the rents are low.

A few thoughts:

1. There are many, many duplexes available in Columbus for $40 to $50k with equivalent rents (although the neighborhoods are less desirable).

2. I do not see a budget for capex in your numbers. This is typically 5%.

3. $170/mo for water - sounds like there's an issue there. Water is typically $30 to $40 per month per unit. Are you sure that wasn't a bill for 3 months (which is how the City of Columbus bills)? In any case, submetering is always a great idea. We recommend it to all of our clients.

4. Agree with all the other posters regarding the value of your time - this is critical. There's no such thing as "free" property management. Every minute you spend self-managing is a minute you're not spending on your primary, income-generating activity (ie, your job/career), or finding your next deal.

That duplex is vastly overpriced. I recommend walking.

All - thanks for the feedback. It is much appreciated. We killed the deal. If any good came out of this, it is that the sellers updated their MLS posting to reflect these owner-paid bills (as they originally claimed tenants paid everything - this info didn't come out until I dug through their leases). Due diligence really pays off.

@Peter Lohmann - My Columbus units run $20/month for water. I did some research, and the Delaware minimum for trash/sewer/water is $45 month. The $40-$50k rentals you mention are exactly the ones I'm not interested in. I lived in Columbus for 15 years, and have a duplex on North Campus. If I could find those kind of deals on north campus, I'd be all over them! But we live in Delaware, and are trying to focus our efforts there. It's a great city with few non-complex rentals, and a growing population due to the tons of jobs nearby. As for cap/ex, I included a single bucket of 15% for vacancies/repairs/capex.

@John Horner  - You are right as far as higher costs. It's Delaware - different community than Columbus. 

@Stan Hill  - I agree duplexes don't appreciate like SFHs. There would be moderate appreciation in Delaware. It's practically a bedroom community of Columbus - everyone drives 20 minutes to the big city for big city jobs, and then returns to small-town life.

@Anish Tolia  - To respond to your portfolio question, we own a couple of duplexes now, are looking to add only a couple more. That is as far as i want my real estate empire to extend. And good point if something happened to the hubby - frankly, I would probably sell our RE and get out of the business. It's setup to be his business, not mine.

I'll keep on looking for the next deal.

Thanks.

Thanks for the post and all the responses. I learnt quite a bit. I'm getting better and better at analyzing deals but every time I learn something new. BP is awesome.

Certainly - to be clear, I do not recommend anyone purchasing those $40-$50k rentals. They are nothing but trouble and my clients end up barely breaking even. I just included it as a point of reference. There's a sweet spot between $40k and $130k.

15% is nowhere near enough for vacancies, repairs, and capex combined. We've back-calculated actual costs over the past 6 years of investing in Columbus (and, for the past 1 year, our 190 units under management). Results are roughly 6% vacancy (3 weeks a year), 15% repairs, 5% capex. YMMV. Repairs and Capex percentages are much higher for low-rent units (less than 800/mo per unit).

Anyway, good hunting! Good deals are rare in Columbus these days. Inventory is low and everything gets bid up.

@pam R. - There HAS to be better deals in Delaware than that. I realize that Delaware is growing and has pretty decent appreciation compared to some of the surrounding counties, but that property is a loser in terms of cashflow, and I really don't think that the appreciation will offset the hole it will put in your pocket. Even @ $750/mo rent I still wouldn't touch it. 

Looking at the MLS, most of the properties seem to be in similar cashflow situations, at least the ones I can find. So you're gonna have to come up with a strategy to either get the houses for a discount (And they don't HAVE to be at a severe discount) or to find distressed properties and build equity through rehab. At $129k the deal stinks, but if you could even get it down to say $115k it would put you in a much better situation.

@Peter Lohman - What areas of Columbus are you in? I'm curious also about your time period of vacancy. 160 units is significant enough to produce valuable data. 

@Brandon Schlichter ,

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