Duplex purchase 100% financed - Is this worth it?
I am looking to go from 3 single family units to 9 units total by purchasing these 3 duplexes down the street from 2 of my other rentals. They were listed for sale at $155,000 each and did not sell. He has since cancelled the listing and agreed to sell them to me for payoff of about $140,000 each - $420,000 total. They were built in 2003 in comparison to my rentals down the street from the fifties. They are 3/2/1, about 1200 sq ft each.
I have a bank that will lend me the money with 15% down. I don't have all the needed cash, but I have one house free and clear that I could pledge in addition to some cash to meet the banks requirements. Even with that route, I would be almost 100% leveraged on this deal. Additionally, I have a father in law that wants to lend more money to me and will put up the $65,000 down in return for 5% interest payable quarterly. So again...borrow from father in law or borrow more from the bank along with pledging one of my rentals....I will be at about 100% ltv....and I prefer to pay money to father in law instead of the bank, especially when the rate is the same.
In my past deals, I bought them and rehabbed them like a flip and felt comfortable with the numbers but never really analyzed them. I am trying to get smarter in my old age and want to know if I am paying too much for these....even though they appraise at $165,000. (they did not sell at $155,000 after being listed for 4 months). Also...I am having trouble comparing apples and oranges. My rentals down the street, 3/1/1 each about 900 sq ft, built in the 50's, vinyl siding, original single pane windows with storm windows on them....I have about $55,000 in each of them. One rents for $750 and one rents for $825. These duplexes are from 2003, built by the seller...larger, all brick and vinyl siding, modern electric etc. Considering the size and age, along with the fact that I don't have to upgrade the electric, replace windows and vinyl siding in next 10 years like on my two rentals....I don't think it is a stretch to value these at $70,000/side. That said...the numbers don't look great so I am wondering if I need to pass on this deal or if the issue is going in so leveraged. We plan on contributing capital to pay down the debt and likely refi them to 30 year fixed rates in the next 24 months or so. Anyway, here are the numbers.
First set of numbers at current rent average: below market rent
And the COC return is useless since I really don't have any of my cash in it day one.
And here are the numbers after I have raised the rents to the MINIMUM market rates of $825/month.