How Good Is This Duplex Investment?

Question

The monthly rent is about $600 per unit, with potential to increase to $650 in the next year.

Each unit is $54,900, but I plan on buying 2 units for a total of $109,800.  Thus the monthly rent would be $1,200 with the potential to increase to $1,300 in the next year.

Real estate loan with an interest of 4.25%, 30 years amortization, with 10% down.

Down payment would equal $10,980 (2 units).

Loan payment would be $98,820.

Monthly P&I would be $486.

Expenses:

Property tax of $56/month (annual $672).

Property insurance of $80/month.

HOA fee of $300/month, which covers water & sewer services, repairs, lawn service, trash removal, and property management.

Total expenses + debt service equals $922/month, so the cash flow from the rent of $1,200 equals $278/month, or $3,336/year.

CAP rate = 8.35%.

Cash on cash = 30.38%/

1 Year investment return = 45.56%.   If the rent potentially increases to $1,300/month, the investment return will increase to 55.32%.

Any thoughts on this deal?  This is the data the seller presented to me.  It looks like he is missing the vacancy rate & closing costs though, maybe some other things too.

Kevin Nichols · Answer

I would investigate what other rents are in the area and the vacancy. There are still a lot of questions be answered. HOA fees....seems iffy. Definitely need details on that. You should get rent details from other sources than the seller. Craigslist, Mapliv.com, call rental signs, etc.

Mark L. · Answer

Kevin, the seller said most of the units are in move-in condition.  The units they would provide me would be one of those, with no repairs needed.  I'm under impression the HOA fee would cover capital expenditures.  I'm not sure if it would be considered a class A, B, or C neighborhood.  There was a powerpoint that he showed me, and from what I saw, it looks more like a class B or C.

Hi Magesh, I haven't actually looked for a bank yet and that may change things.  The seller is actually sort of a family friend who is a real estate investor, and those were the numbers he presented to me.  They said whenever the down payment is less than 20%, the lender may require the home buyer to purchase mortgage insurance, but he said it is usually inexpensive when the home price is not high.  That's another expense that he did not account for in his projections, though.

Kevin Nichols · Answer

Make sure you look at comps in the area. What type of area is it? A, B, C neighborhood. Look at the current length of leases and quality of the tenants. Are there any deferred maintenance issues right now? If so, you may be dropping money immediately.

You need to get a better definition of your HOA fees.  What does "repairs" and "property management" cover?

Also, you need to budget for capital expenditures. Eventually you'll need to drop $5K for a new roof, etc. The CapX could be $500-$600 per door, per year and should be added to a separate account.

Other than that, it looks like a good deal.