Need help analyzing this deal

13 Replies

I need some input on this Duplex deal. I have a banker that will do 100% finance on them for 30 years at 5.75 interest rate. The seller has owned this property since 2005! One tenant has been there 20 years. Wood floors in some, new Roof, New A/C in units. Well maintained and ready to be sold. The units are 100 percent occupied and the units are separately metered. The property is located in a c or d area located around college campus. The owner also has two more duplexes at this price. I'm coming up with a payment of $621.00 per month including PITI.

Asking Price- $65,000

3 BR 2 BA

21-30 Years of age

Total Square Footage- 2,250

Income - $1100 a month

It might help if you gave a break-down of the expenses like this:

COSTS

mortgage

insurance (fixed)

vacancy rate

taxes

property mgmt company

water bill, sewer, garbage

city annual fee

misc big ticket items

Based on a $65,000 buy price, financing at 5.75%, rent at $1,100 you can estimate net operating expenses at 50%  and net operating income at $6,600.  I want my net operating income divided by my buy price (cap. rate) to equal my cost of money + at least 3 percentage points.  Since your cost of money is 5.75% I would use a cap rate of 8.75%.  Dividing the operating income of $6,600 by .0875 gives me a value of $75,429.

At this point I would still be interested.  You need to estimate the individual components of the expenses as Minka suggested.  Also, estimate maintenance costs.  These costs maybe lower or higher than the 50% of rent estimate.  Substitute the new expense number in the equation,

This is or is not a good investment depending on the cap rate that you require.  My opinion is just my opinion.

Good Luck.

Bill

For the mortgage: principle balance of $65k, interest rate of 5.75% for equal monthly payments for 30 years will give you something like this:

Interest:         $311.46

Principal:        $67.86

Property tax:  $81.25

PMI:              $270.83

TOTAL:         $731.41

It looks like you might not have included the property tax as part of your calculation?   And keep in mind that this does not include any other expenses.

@Bill thanks for the reply, for as expenses the tenants pays all utilities, lawn care. The existing owner manages the property himself. After I figured the 50% for expenses and figured the PITl it didn't cashflow.

You're also financing 100%, which means that's the least amount of cashflow possible (because your payment is as high as it can be). I'd run the numbers on the expenses, because if the property is in good shape and the tenants are long term with no interest in moving (and you self manage), you've probably shaved 20% or more of your expenses.

I know insurance is relatively high in Louisiana, how are the property taxes?

The 50% rule is a guideline, after all. If you get this to cashflow at all it's pure profit, because you put zero down. So I'd at least take a close look at it.

@JT - The property taxes are $900 per year and  one of the tenants have been there for 10years

@Patrick Rowe  

  If you are serious about this property would ask to get teh P&L statemetns from the current owner going back two years.  Minka outlines alot fo the baseline expenses you can expect , so that should be a good guide .  Are you going to manage yourself ?  Is there any other maintenance .  Do you have an insurance quote  ?  Remember the %50 rule also encompasses taxes and insurance a part of teh expenses, so inital analysis would look like

Income  1100- Expenses (650) - Finance (PI=380) ==$270 month cash flow

Ken

@Kenneth- Ok thanks, After my analysis I'm coming up with the following. My plans are to hire a property manager. I found out from the agent that the tenants pays all the utilities. Let me know your thoughts on this

Income- $1100

Expenses-$650

Finance -(PITI $620

Cash flow= -170

@Kenneth Hynes  The property taxes, insurance are.

                             Insurance -$2000

                             Taxes- $900

@Minka Sha  

COSTS-$65000

mortgage- $65,000

insurance (fixed) -$2000

vacancy rate $100% occupied

taxes -$900

property mgmt company - 8%

water bill, sewer, garbage- tenants pays utilities

city annual fee-N/a

misc big ticket -N/A

It's negative cash flow at 65k.  I'm coming up with about -$40 cash flow with you keeping at least $100 for repairs, etc ($1200/year), spending insurance, etc. Also, assume a vacancy rate of 10%, 8% for Property management. 

  • How is the neighborhood? You might want a higher cap rate if you are signing up for a headache.
  • Where I live, owner pays the water/sewer/garbage and tenants pay other things. You may want to confirm as this can be a cost of $92 or so per unit.

Here is what I get for your deal:

INCOME

Monthly Rental $ 1,100.00

COSTS

mortgage $ 373.74

insurance (fixed) $ 166.67

vacancy rate $ 110.00

taxes $ 108.33

property mgmt company $ 88.00

water bill, sewer, garbage $ 184.00

city annual fee $ 10.00

misc big ticket items $ 100.00

TOTAL MONTHLY EXPENSES (with mortgage) $ 1,140.74

TOTAL MONTHLY EXPENSES (without mortgage) $ 767.00

Monthly cash flow (with mortgage) $ -40.74

@Minka Sha  -OK thanks, the duplexes are in a C or D class area. I will check with the agent to see if that includes water/sewage/garbage. I thought the $100 a month for repairs would cover misc big ticket items? Also for as the city inspection fee I'm not aware of any city fees annually, but I will do some research. I was figuring a 8% cap rate. I would like to get some advice on coming up with a offer price. I'm trying to accomplish $200 per door on this deal.

I contacted the agent about some comps on a duplex I'm looking at purchasing. The agent said she had to go back 2 years to find something. The comps she sent me were foreclosures and one of them were pending, sold. So how do I determine the value on this property with comps that are foreclosures and 2years old?

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