Need help on Duplex purchase
Looking at purchasing a 1996 duplex in a good neighborhood. The person selling the duplex tells me it has a 10% cap rate which I can't confirm. I come up with a 6.9 cap rate. Is this a good buy?? If I go by the 50% rule it doesn't seem to be a good buy but seeing as the tenants are paying for all utilities I would thing the 50% rule may not apply.
The duplex has the original furnaces with central air, roof and appliances. All seem to be in good shape. 3 bedrooms with 2 baths in each unit. The duplex has a daylight basement in which 1 bedroom and 1 bath are located with an additional family room which can be used as a 4th bedroom. Utility and washer and dryer also located in daylight basement.
183000.00 price
950. a month per unit
22,800 year income.
Taxes $4700
Insurance $1400
Cutting Grass $500
Misc. $1000. Estimate.
Tenants pay for water, electric and gas.
Loan for full price 30 years at 4.125%.. $887 a month P&I
Thanks for your input.
Rob
I wouldn't worry about the 50% rule so much. Verify rental rates are accurate. Also, verify how many days on market at that rate. $950 a month per unit sounds good, but not if it sits for 5 months vacant because it should really be $850 a month. Verify all expenses and make sure that the unit has separate water meters. If it cash flows say $100 per door after all expenses like PITI, PM, vacancy and maintenance then do it. Just my opinion.
Originally posted by @Rob Smith:
Looking at purchasing a 1996 duplex in a good neighborhood. The person selling the duplex tells me it has a 10% cap rate which I can't confirm. I come up with a 6.9 cap rate. Is this a good buy?? If I go by the 50% rule it doesn't seem to be a good buy but seeing as the tenants are paying for all utilities I would thing the 50% rule may not apply.
The duplex has the original furnaces with central air, roof and appliances. All seem to be in good shape. 3 bedrooms with 2 baths in each unit. The duplex has a daylight basement in which 1 bedroom and 1 bath are located with an additional family room which can be used as a 4th bedroom. Utility and washer and dryer also located in daylight basement.
183000.00 price
950. a month per unit
22,800 year income.
Taxes $4700
Insurance $1400
Cutting Grass $500
Misc. $1000. Estimate.
Tenants pay for water, electric and gas.
Loan for full price 30 years at 4.125%.. $887 a month P&I
Thanks for your input.
Rob
HI Rob,
-The rate of 4.125% for a non owner occupied seems a bit low, it would most likely be around 4.625% or 4.75% but thats not going to make a huge difference. 4.125% could be true if you were living there as a primary residence but then your numbers wouldn't be correct because you will only have one side rented.
- the 50% rule and other rules of thumbs are just rules of thumbs so you can quickly scroll through a list of 50 properties and figure out if the subject property warrants further investigation. If I were you I would learn what makes up the cap rate formula and figure out the relevance of what it means to have a 6.9% cap versus a 10% cap to see if it makes sense for your specific preferences. For some people 6.9% may be too low or too high.
- Noticed you dont have property management, will you be managing this property yourself ? Usually duplexes run around 8-10% + 50% lease up fee on the first month.
- Also noticed no vacancy, unless if the area is really in high demand you may use a lower figure like 2-3% but typically banks will assume 5% vacancy factor when determining net operating income.
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- Avenue One Capital Inc
Yes, I will be managing it myself, it is 3 miles from where I live.
The rate is 4.125 because I'm going to take out a mortgage on the home we live in that is free and clear. If I factor in one month vacancy a year it still seems to cash flow nicely, but is it considered enough?
It looks like after expenses I will have $200 a door a month, is that considered a good investment?
22,800. rent
7,000.00 expenses
15,800 net profit
10,728. P&I
5,072. a year or $422 per month
@Rob Smith You have to answer your own question when it comes to "is that considered a good investment?" If this was in my area I would jump on it if those numbers were true, however in your area it might be a so so deal. Only you can decide if you will be happy with the rerurn on your money, if it fits what you are looking for and the numbers pan out then only fear of the unknown is whats holding you back.
I've got to agree with Chris, you've got to consider your area and market. The general rule of thumb that I use in CA, is buy at 100X monthly rent or less, sell at 200X monthly rent or more. Not hard and fast rules, just general gauges. My wife is from Dearborn, so I Googled Grandville, and, clearly, your not in the Upper Peninsula. It looks like you're near Grand Rapids, and have a job center to commute to.
I'd crunch the numbers again at $850-$900/mo per unit rental income and 85% to 90% vacancy, and see if that'd work for you. Also, I'd get an estimate on insurance, and see if there is a premium in your market for providing lawn/landscaping service. I'm ultra-conservative, so, depending on your risk tolerance, you might reach a different conclusion, but it looks good to me.