Need a quick analysis PLEASE!

60 Replies

Hey everyone,

I found a duplex that needs some work but is in livable conditions. One unit has 4 bds, 1 bath. the second has 2 beds and 1.5 baths.

Unit 1:

4 beds

1 bathroom

Rent=1450/month

Unit 2:

2 bed

1.5 bath.

Rent=1150/month

Expected Expenses breakdown to the following:

Water/sewer= $120/month

Electricity=$40/month

Gas=$35/month

Trash=$35/month

Everything total=$7,168/year

Rents come out to $31,200 a year and $24,032 after a rough estimate of expenses.

My goal would to rent out each room to the college students nearby for $600 per room/month. That would increase the rent by $1,000 a month by doing different marketing that will be free. That would bring my rent after expenses to around $35,000 a year.

The place needs fixing but college students don't mind that too much, being a college student myself. I would have parents cosign to ensure payments and the house doesn't get trashed. This rent is very reasonable for the area and convenience it has.

One of my only problems would be coming up with the financing to own this place. Any help here would be greatly appreciated!

Please let me know what you all think! Thank You!

You don't pay property taxes?  You don't have to pay insurance?  Those electric and gas bills look low for my area but maybe California is different.  Are you going to use a management company or do everything yourself?

Well that's a horrible mistake on my part. PITI for the property would be roughly around 2,000 a month. Taxes would be no more than 4-5 thousand a year. Which I feel leaves pretty good cash flow each month. I could also bundle all the utilities in and take care of it for the college students and charge more each month. I know how it could be a hassle to deal with students and bills and paying them on time. If I don't do that, electricity, gas, water/sewage could be passed onto the tenants.

I would do the management myself and use a handyman that would do most of the fixes.

Originally posted by @Nathan Emmert :

You don't pay property taxes?  You don't have to pay insurance?  Those electric and gas bills look low for my area but maybe California is different.  Are you going to use a management company or do everything yourself?

Being a student at the same University, I feel like I know the market much better than anyone around and I know what is acceptable and what can be done in the area. Student housing just seems to be the better, more profitable way in this house that is about 2 miles away from one of the largest universities in the state.

Rents come out to $31,200 a year and $24,032 after a rough estimate of expenses.

You have seriously underestimated your expenses.  You've missed taxes and insurance, which you are guaranteed to have every month.  IDK if you're using a PM, but if so, you will have that every month.    You will have ongoing routine maintenance and make ready costs between tenants.  You will have periodic big expenses like roofs and appliances.  You have a chance of having major tenant damage or a lengthy, expensive eviction.

Your $24K number is the "net operating income".  A better estimate of that would be $15,600 if using a PM, $20K if not.  If you're not using a PM, then realize you are earning the difference between those numbers by doing the PM's job.

Jon Holdman, Flying Phoenix LLC

ummmm........what does it cost?  Diddo what Nathan is saying.  If you are going to live there then subtract out that room expense and your portion of utilities.  So from what you have said you should pay no more than 100k to 200k depending on what you find out about the expenses and anticipated upkeep expenses in the next 5 years.  If it is more than this just forget it.  If it is in this range then it warrants more investigation.  If it is less than this then something is weird and proceed with extreme caution.

Nathan has some good points.  When you do your property analyses there are 6 major items to include:  principal, interest, taxes, insurance, maintenance, and vacancy.  

The first four are also known as PITI. The maintenance is more difficult to estimate, but I'm sure you can reach out to some contractors or experienced real estate investors in your area to help you estimate those. Also, don't forget to include vacancy into your numbers. I typically estimate by assuming that the property will be vacant 10% of the time, but again, this estimate varies.

You've done a lot right so far and I think you are headed down the right track.  However, you may have jumped the gun by looking for investment real estate before securing financing.  If your goal is to own the property, then you are setting yourself up for a painful experience by potentially finding great property deals that you don't have the money to buy.  

I highly recommend talking with several different banks to see how big of a loan you can qualify for.  Also try talking with credit unions as they tend to have less strict guidelines for lending.  

Originally posted by @Jon Holdman :
Rents come out to $31,200 a year and $24,032 after a rough estimate of expenses.

You have seriously underestimated your expenses.  You've missed taxes and insurance, which you are guaranteed to have every month.  IDK if you're using a PM, but if so, you will have that every month.    You will have ongoing routine maintenance and make ready costs between tenants.  You will have periodic big expenses like roofs and appliances.  You have a chance of having major tenant damage or a lengthy, expensive eviction.

Your $24K number is the "net operating income".  A better estimate of that would be $15,600 if using a PM, $20K if not.  If you're not using a PM, then realize you are earning the difference between those numbers by doing the PM's job.

If rents were to be $600/room/month, $43,200 would be the total income. Minus the PITI which would estimate to $24,000/year (that's being conservative) leaves $19,200/year. Take 50% for expenses and reserves and major renovations and that leaves $9,600/year. taxes would take out another 4-5 thousand(conservative again) leaving $4,600-$5,600/year. Am I missing something else? that would cashflow between $350-$450/month.

I would have my vacancy rates near 5% because I would have 12 month leases for students that are always coming back every year. The house is listed at 399,999. You have to realize it is in Southern California and not in the middle of Kansas.

Oh and to add, I have talked to a private mortgage company already. being 22 and using it as investing, I would need between 25-30% down. I have talked to people who would be able to put up some money for the down payment. I would rather work hard on a property and learn the process and potentially wholesale it if I can get a great deal then do nothing at all and run my wheels trying to get financing for a place that has just been sold.

@Christian Belleque  

I think you're fooling yourself if you're using 5% for vacancy rates even with 12 month leases. Duplexes are notorious for high vacancy rates especially with college students. I would use at least a 10% factor and that might be on the low side.

Mike D'Arrigo, Pinnacle Investment Properties, LLC | [email protected] | 800 348‑0956 | http://www.investwithpinnacle.com

Originally posted by @Mike D'Arrigo :

@Christian Belleque  

I think you're fooling yourself if you're using 5% for vacancy rates even with 12 month leases. Duplexes are notorious for high vacancy rates especially with college students. I would use at least a 10% factor and that might be on the low side.

Even with parent cosigners? I have lived in several houses while being in college, all being 12 month leases with roommates and everyone has paid for all 12 months. There needed to be a 1 month notification if anyone was moving out. Maybe I am being foolish but those numbers come from my experience in my area.

@Christian Belleque  

Not to be cynical but you're probably more responsible than most. Most college students your age aren't thinking about investing in real estate. They're thinking about the party they're going to this weekend. Having parents co sign might help but you can't always assume that the parents are anymore responsible. Bad tenant behavior comes in all ages. I may be overly pessimistic but my experience with duplexes has taught me to be ultra conservative on my projections. Having said that, every market is different and I don't know your market.

Mike D'Arrigo, Pinnacle Investment Properties, LLC | [email protected] | 800 348‑0956 | http://www.investwithpinnacle.com

 @Jay Shapiro  Agreed...

Would you purchase an investment property w/out knowing it's cash flow, cash-on-cash return, and total ROI? I wouldn't either. And it's impossible to calculate those real numbers w/out first knowing your financing details (i.e., loan amt, down payment, closing costs, interest rate, etc.) Relying on estimated data in regards to YOUR financing is not a good idea.

Originally posted by @Christian Belleque :

I would have my vacancy rates near 5% because I would have 12 month leases for students that are always coming back every year. The house is listed at 399,999. You have to realize it is in Southern California and not in the middle of Kansas.

At $399,999, the $2600/month would only amount to about a 0.65% rent to cost. I agree with John that your NOI will probably be around $15,000, which would make for only about a 4 cap and probably wouldn't cash flow with a loan. I think it's too expensive.

Medium apartment logoAndrew Syrios, Stewardship Investments | http://www.StewardshipProperties.com | Podcast Guest on Show #121

Originally posted by @Mike D'Arrigo :

@Christian Belleque  

Not to be cynical but you're probably more responsible than most. Most college students your age aren't thinking about investing in real estate. They're thinking about the party they're going to this weekend. Having parents co sign might help but you can't always assume that the parents are anymore responsible. Bad tenant behavior comes in all ages. I may be overly pessimistic but my experience with duplexes has taught me to be ultra conservative on my projections. Having said that, every market is different and I don't know your market.

Those concerns are probably well deserved and are noted by me. It is funny because I played baseball my whole college career and only stayed with baseball roommates and we seemed to be pretty well behaved. Especially for a team who's nickname is the "Dirtbags". So your biggest problem with this property is the fact that it is college students and the vacancy expectation is low?

In talking to the Agent, I learned that the sellers are investors themselves and just want to get out of the property to invest in something else. I took this as a hint that they would take a deep discount on the property if it meant a quick closing. I would say around 350-375K

Originally posted by @Andrew Syrios :
Originally posted by @Christian Belleque :

I would have my vacancy rates near 5% because I would have 12 month leases for students that are always coming back every year. The house is listed at 399,999. You have to realize it is in Southern California and not in the middle of Kansas.

At $399,999, the $2600/month would only amount to about a 0.65% rent to cost. I agree with John that your NOI will probably be around $15,000, which would make for only about a 4 cap and probably wouldn't cash flow with a loan. I think it's too expensive.

I would have $3,600/month. 6 rooms at $600 each

Originally posted by @Andrew Syrios :

I don't know that market and I know Southern California is crazy expensive, but that still seems very tight to me especially since it needs some work.

I stayed in a house last year that was $3,100/month for 4 beds 2 baths. It was a little nicer but it wasn't worth $175/month better. It is ridicously expensive here especially considering the property is only 2 miles away from the beach and 2 from the school.

No way.  Doesn't pass the sniff test.  Rent and if you still want to do this when you graduate find a better area.  Why do they want their money out?  High vacancy, market rents are maxed out, upcomming maintence? All of the above?  Investors dont give big discounts any more or less than normal people, perhaps less as they can fixate on numbers and return.  There are better opportunities out there.  I suggest pass.

@Christian Belleque  

That's funny about the baseball team! Actually my first concern would be the fact that it's a duplex. I'm not a big fan of them. Tenants are more transient and don't take as good of care of the place. Piling a bunch of college students in one is just icing on the cake.

Mike D'Arrigo, Pinnacle Investment Properties, LLC | [email protected] | 800 348‑0956 | http://www.investwithpinnacle.com

Originally posted by @Mike D'Arrigo :

@Christian Belleque  

That's funny about the baseball team! Actually my first concern would be the fact that it's a duplex. I'm not a big fan of them. Tenants are more transient and don't take as good of care of the place. Piling a bunch of college students in one is just icing on the cake.

I suppose the only control that I would have over any of these issues would have to be high deposits and managing the tenants. I guess it would be a good thing I know the coach and could easily make them suffer by running or any other punishment.

After looking into the MLS on the property, it says the taxes are $5,938/year Insurance is $1,000/year and all the other expenses including these are $7,168/year. not too bad considering the mortgage on a 20% down would be around $2,000 a month. with rents at $3,600/month and 50% of the $1,600/month going to reserves $800/month cashflow doesn't sound too bad. Even if there is some work that needs to be done I could throw in a extra couple hundred a month to cover it.

Knowing your tenants is good and bad... they "should" behave... but you feel handicapped when they don't... are you really going to evict one of your friends when he loses his part time job at McDonalds for smoking pot in the bathroom and can't pay his rent for 3 months?

Also, what have you budgeted for getting the house rent ready?  If you're like most college, people don't move off campus until their sophmore or junior years... that means you have 2 - 3 years of people returning at best.  You're going to have 2 - 4 rooms turn over every year and frankly college students aren't gentle on stuff...  

Also, this is a duplex, not a SFH... you might be able to keep your side clean... what are you planning to do about the kitchen and the bathroom on the other side? College boys and kitchens... bathrooms... yikes!

Don't get me wrong, you have some advantages that a typical "investor" doesn't in this case which will help you do some creative things... some of us (most probably) are just trying to prepare you for the entire experience.