First deal, good or bad?

22 Replies

I bought a duplex this summer for (was going to list at 129k, before we started negotiations) 115k, rent is 600 for each side.  Also seller paid half of closing costs. No vacancy (one unit has a 4 yr long term tenant, and other side has new 1 yr lease) and plan on doing my own property management as well as repairs.  My loan was 30 year fixed at 4.5%, with 25% down.  My payment is 660 and my insurance is 900 year.  Please let me know how I could have done this deal better! 

It looks like you did a good job, but honestly there is really no way to know without knowing your area. If from now on all the houses are going for $100 you could have done better, if they are going for $150k you did awesome.

Personally ever deal we have done has been better than the first. The key is not to dwelling not the past but learn from it and move forward. Biggerpcoekts is an AMAZING site! At the same time it has people from all over the country talking about different markets. You can't compare yourself to anyone but your market. We get don't foliow any of the rules but do very well based on follow "our" business plan!

Hope this helps!

Those numbers looks good, but as mentioned in the first reply, the expected returns will vary between markets.  Also the purchase price vs. market value makes a huge difference.  If you paid a 20% premium, then it will take a lot of cash flow and appreciation for it to turn out well.  If you bought at a 20% discount, then you have a lot larger margin of error than if you bought at the market rate.

Where in Indianapolis area is your property? Hard to judge your numbers with out knowing the neighborhood you bought in. How many Bedrooms per side? 

How much are you cash flowing after all expenses and hold backs?

Thanks for the response.

@Justin Owens I bought this property in Bargersville, which is south of Greenwood and is Center Grove Schools. The School system seems to be something people want and has kept rents up. I also bought it because of the location, it is by 2 parks, but has some land behind it that I might build a garage for the tenants (and maybe some storage for me). But not sure I want to do that when I can invest that money in to another property and probably get a better return. Did find out during closing that former owner bought the property for 119k 10 years earlier (not sure this helps). Also I am not sure what you mean by hold backs? After all of my monthly expenses (PITI), I cash flow about 500 a month. I have a small emergency fund for anything that goes wrong. But the furnace and water heaters are new or newer, roof is about 3-5 years old. I have had to take care of small things, but nothing big.

@Elizabeth Colegrove   Thanks for your response. I new that I needed to do a deal and then analyze it after, to get me moving out of the analysis paralysis zone.  As well as learning from my mistakes. My sole purpose at looking at this is to make sure I do better next time.  Thank you.

At first glance, this looks decent man, but are the tenants paying all  utilities?  (Gas, Water, electric, perhaps sewage?  Stacked duplex or side by side?  Separate utilities?  Can rents be increased a little?  If there is long term tenants, increase it by a number that they woulnt move over (50-75$).  Just some things that I would look at if it were my place.

Too much.  For $600 rent you shouldn't pay much more than $40k/door.  Perhaps your taxes are very low, but still...

I think you'll be OK with 30-year note, but just barely.  With this deal, you are a retail investor...time to sharpen your pencil!

@Chris Wood  I would say given your cash flow amount of $500 you made a decent deal. By Hold backs I mean putting money aside from the rents for things like the emergency fund, which you are doing. However I do have to agree with @Ben Leybovich, I think you paid a bit too much just from a numbers perspective. Its hard to evaluate such a rural area though. Not as much growth in future rents down there in the rural areas. So I worry about increased expenses dwindling your cash flow greatly.  But there are a ton of good Manufacturing jobs there south of Greenwood. So you shouldn't have a problem renting it out ever, along with the good schools of course. Hard to argue with $500 a month in Indiana though, thats a good amount of money in your pocket.

I'm assuming that for 115K with the mechanical updates that were recently made, that its in very good condition.

Hard to give a good answer because there are really not enough details here.

If their $129k was retail, you paid too much. 

We always go for seller financing which usually works out at 0% interest and no costs to purchase. Not saying this was an option with your deal, just something to study for the future.

As @Ben Leybovich said, "this is pretty much a retail purchase" but you'll get better with every deal you do. 

CONGRATULATIONS on jumping into real estate investing. There is no better business on earth!

:)

If you are happy with that cash flow while having $30k tied up, then you did just fine. I judge my deals by how much cash I have to tie up versus the time it will take to get my initial investment back. I want it back within 3-4 years so then I have 100% positive cash flow. This isn't very likely in most rental situations so that's a big reason I don't do a lot of rentals right now. I'm mostly doing flips and making 25-30% on each flip (2-4 a year) so I am doubling my money every year at least and I have my cash free to be able to buy a deal when it comes up. Sounds like a good, solid first investment that you can get your money back out of anytime you want. I don't know if that area will appreciate much over the next 10 years but being able to buy a property that will hold value while cash flowing is an attractive investment for a bank loan type of deal that should be mostly passive. 

Here is a deal I like that a friend just did in Columbus, IN. $18k cash purchase of a SFR. $3k in make ready. Rents for $500 a month. Full cash return in 3 years and then straight profit on a house that's owned outright. That's the only types of deals he likes to do and is hugely successful with them.

Assuming 0 vacancy, 0 utilities, 0 management, and 5% of rents on repairs.

Down Payment - 28750 

Closing Costs? - Say 1250 to make it easy math 

Total Cash invested = 30,000

Rent - 14400

PIT - 7920

Ins - 900

Maint - 720

Net Income - 4860

Yearly Cash on Cash Return  - (4860/30000) = 16.2%

Return Including a more realistic 5% vacancy = 13.8%

I'd say not bad for your first purchase!

I think you can get it up into the 25-35% return no problem with some experience. Even higher.

Originally posted by @Elizabeth Colegrove:

Personally every deal we have done has been better than the first. The key is not to dwelling not the past but learn from it and move forward.

Love it!

@Chris Wood  , as mentioned a few times above - the deal barely works and is "retail".

I assume they are 2BR per side? If so, $600 sounds way too low for that side of town.  I've got that much in warzones before for a duplex.

How much is property tax?

The insurance sounds a little high as well.

IMHO - you could have picked up 2 nice 60's ranch homes that rent for $750+ each for about that same investment. In addition to the extra cash flow they would provide - it's always easier to sell a SFH than a duplex in the future as an exit strategy.

Also, next time, I would suggest buying the property with cash and then doing a refi.  This should pay back all of your initial principle and maybe a few dollars in equity.  In the end, you have no cash out of pocket instead of the 25% down...

But...at least you've got one under your belt now!  Good job, you're ahead of most new investors.

@Shawn Holsapple    My 2 biggest problems with this deal for what I see, was retail (I hate buying at retail when I know things can be bought cheaper!) and the fact that so much cash was locked up to make this deal happen.  I am currently looking at some houses to rehab with the exit plan being to sell or refi and then rent. 

Yes they are 2/1, and you think rent is really to low? I am not sure how much more I can get out of a 2/1 with out a garage. This is a side by side duplex.

@Dale Hensley   One of my biggest issues with this deal was the 30k lock up and the time it is going to take to get it back.  There is got to be a better way.  Also love the Columbus deal, still trying to find one like that in my area.  Funny thing was I was just in Columbus and thinking about looking down that way but trying to figure out if it would be worth it being that I am trying to manage them myself. 

@Shawn Holsapple is right. The rents may be low for what you have. My fiancé had 2 rentals in one of the worst neighborhoods in Indianapolis that she paid $12k each for. They were 2/1 with no garage and she was getting $500 a month (gross) out of them. She held them for a year and then sold them to a hedge fund in California for $25k each. We used that money to start flipping. Made $27k on our first flip and built from there. Our results probably aren't typical but we have been very successful so far. I am listing a SFR for sale in Fishers next week that I bought at auction and do some repairs to. Should meet about $30k. Our plans a to flip a few more to build cash and then start looking to build monthly cash flow so I can leave my day job.

@Shawn Holsapple  @Dale Hensley  

I understand that it might be to low. But not sure how high to go next year. I know the rent has not changed for this brick duplex with 2 bed /1bath  each side and about 850 sq ft. Leases will be up next year and I will raise the rent but not sure what to go to, any suggestions on how to figure this out?  I see the zillow rent says 843 but that seems very high, I don't want to have a high turn over but would like to price it right. Thanks 

Dale-

I am currently looking at a SFR that is in Franklin and another in Bargersville. I am hoping to shift to the same model you are thinking about doing. I have been in construction field a lot of my life and have a lot of solid contractor friends. I am hoping to utilize this to help me with my rehabs. But I definitely hope that my success starts with these next couple.

Chris,

You aren't going to get hurt, and the fact you said it's a brick duplex, it's probably a solid property in a good neighborhood. Bargersville is ok, but less potential tenants down there than indy metro. But as a pure rental prospective, you paid too much. Using the 50 percent rule for operating expenses long term. You are probably netting 160 a month, or 80 dollars a unit. on a duplex that isn't great. If you do the management you can bump that up some.

To give you an idea i bought a duplex over the summer, in emerson heights(not the greatest area,but not a total war zone either) that is a 3/1, older building(higher long term expenses) and I paid 59k(which i now believe to be too much)  i get rents of 600 per side. 1200 total. Bargersville should be less of a hassle than my duplex. But I got seller financing and only had to invest 12k of my own money, i am getting a 30+ percent cash on cash return and hitting the 2 percent rule(research the site for info). My net with management is around 300 or closer to 400 with me managing. that's 150 to 200 a door, which is what I would shoot for on your next one.

Good luck!

Man, you guys are really making me think I should be hunting deal in the Indy area. My gf lives there so I'm there once a month anyway.

Chris,

Congratulations on taking the leap of faith.  You're now off and running and as expressed above, you will only learn more and improve with each deal.  Here's to your next success!

Happy New Year

Mike

@Michael Buckland   Thanks for the encouragement!

I also wanted to add that the tenants pay all utilities including sewer.  Sorry I forgot to respond to that earlier.  Thanks everyone for their responses. I often times learn by doing. Guess its time to jump into another property..

@Chris Wood  

First and foremost, congratulations on pulling the trigger and taking action.  Most people never have the courage to get started investing. Yes, you could have done much better by utilizing the strategies others in this forum have recommended. However, there is still a ton of value gained by applying what you learned from this purchase.

Are you limiting yourself to purchasing in Johnson county?  There are huge returns to be had all over Indianapolis, even inside the loop.  

I have to agree with @Ben Leybovich . On the surface, it looks like you paid too much. Your rent/price ratio is barely over 1%. You can get well over 1% on a SFR in Indianapolis. I would expect better than that on a duplex. Sounds like you'll still be ok though.

Originally posted by @Chris Wood :

@Shawn Holsapple @Dale Hensley  

I understand that it might be to low. But not sure how high to go next year. I know the rent has not changed for this brick duplex with 2 bed /1bath  each side and about 850 sq ft. Leases will be up next year and I will raise the rent but not sure what to go to, any suggestions on how to figure this out?  I see the zillow rent says 843 but that seems very high, I don't want to have a high turn over but would like to price it right. Thanks 

I use Zrent [zillow] & rentometer.com.

Plus, you should call other for rent ads in your area to see what they are going for. As a rule of thumb, a duplex will rent for about $50 less than the exact same size/features SFH.

I would think you should be able to get at least $700 per side without much push back.

I have a 3 unit in Plainfield [similar to your area] that I get $500 for each of the 1 BR Studio units [450 sq. ft].

Of course, the flip side of raising the rents is higher turn over which equals less profits as well.  It's a fine line.

Also, I would suggest not telling the tenants that you are the owner.  Instead just the "poor" property manager.  I know there are arguments about this technique and the ethical side of it as well.  In fact, you are telling them the truth & I have not issues telling them that "I'm just the Realtor for the landlord" - in my case.  Of course I use a PM on ALL my rentals, I only self manage my lease to own properties which require nearly no management.

If you haven't read Mike Butlers "Landlording on Autopilot", you should do so at your earliest convenience.

Another thing you should consider is to make all your leases expire in May.  It's much easier to rent a property in the spring than the middle of February!  I learned this from Mike Butler as well.  For example, I signed a lease last week with a tenant that expires May 2016.

I hope that helps.

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