I cant make the numbers on this duplex work and I dont know why

10 Replies

I talked to my bank, I don't have a pre-approval per say, but I have a great relationship and I can get a 50K home equity loan (against my personal home, long story, bankruptcy and house going back means no conventional financing for a few more years) at around 4% for 15 years equals a monthly payment of $370 a month. There is a two story duplex for sale in a solid C neighborhood, working class, 700 sq ft and each unit is 2/1. Upstairs has been refurbished within the last 6 months (current owners are living upstairs while also re-doing the down stairs. Most of the work is complete, needs paint, carpet and finishing touches). Units are separately metered, they installed piers, and updated the electric. It has been on the market more than a month for 40K, I plan on looking at it later this week. Worst case scenario they don't budge on price and it takes 10K to finish the down stairs unit (I cant imagine it being 50K to purchase and be rent ready, but lets just run with that number because of pre approved financing). I own a rental property close (2 miles away) SFR 2//1 that I rent for $450 but it is tiny, 500 sq ft, I think each of these units should rent for $550 (rentometer.com puts that as reasonable and towards the lower end of rent).

Using the 50% rule $550-370 payment = $180/2 = $90 per door = horrible and unacceptable.

This property does meet the 2%, actually, almost 2.5% which is great (I think)!

This is what I know about the property. It was built in 1930 (this does not scare me, I am very mechanically inclined, plan to do all my own maintenance and repairs), last years taxes were $1054. That's it lol. I am just scratching my head at how a duplex in an area I want to be in, at 25K per door (I bought my SFR for 20K about 6 years ago) to me screams that it is a great deal and I would kick myself for not buying it does not cash flow. What am I missing? I love my SFR, had the same renter the whole time with virtually no maintenance needed on it. Am I the luckiest land lord in the world? Will this need constant repairs and dipping into the 10% funds of maintenance and capex and vacancy funds?

Sorry this is so long, I am just trying to figure out if this property does not work, what does?  The only thing I am seeing is since I am using 15 year financing, if I change it to 30 years (conventional financing) the monthly payment is only $238.  So if I take the 550-238 = 312/2 = $156 per door which still seems WAY too low.      

If you're looking for decent cash flow, financing 100% at 15 years, forget it.

I believe the property is under market value (I could be wrong, if it was a steal someone else would have already bought it the more I think about it), so with that being said, a 40K note at 30 years on a property worth 50K has a payment of $190 which cash flows $180 per door.  So it is all about the terms of the financing, but would there be significantly more interest on the 30 year note?  Seems like the extra cash flow would eventually be paid in interest to the bank.      

You can't force the numbers. You make good estimates, plug them in, and see if it works. if it does....go for it. If it doesn't...walk away. Ever seen someone DETERMINED to make something work at any cost...and walk away losing on the deal? Don't fall into that trap.

No company avatar mediumJohn Thedford, John Thedford | 239‑200‑5600 | http://www.capehomebuyers.com | FL Agent # BK3098153

Ditto what Dawn said ,, unless you are taking the first %550 and putting towards expenses alrad

total rent 550*2 = 1100

expneses (insurance , taxes, maintenance , PM, vacancy) = ?? 

I think the property meets your initial criteria enough to get real numbers for your expenses.  Do you have an insurance quote ? 

What are the PM fees in your area   ( een if you plan to manage on your own)

What utilities are is the landlord responsible for  ? you said seperate meters .. for what .. electric ?  water ?  Does owner pay sewer and or trash  ?

Talk to a realtor or PM about vancancy rates in the area .

Since both recently rehabbed  you r mainenance fees might be lower , but then agian it is a 1930s house

He is using $550, because he already applied the 50% rule to the gross.

@Dawn Anastasi  and @Kenneth Hynes I was under the impression the 50% rule was take 50% of the gross rents (1100/2 = 550) and that is what is left for PITI and cash flow. Am I not understanding that clearly? I think its the same as if it were a SFR that had a cost of 50K and rented for $1100 right? Still 50% of 1100. Using traditional 30 year financing, 20% down (10K) and a note of 40K = a payment of $190 which leaves $180 cash flow per door which is great. I see as @Wayne Brooks   said, cash flow with 15 year financing does not work.  So the bottom line is that this is probably a good property at a good price(provided everything checks out), but to make it cash flow it needs traditional 30 year financing.     

@Bily Elliott you need to remember that you are 100% financing the property, so in reality, your $180 cash flow is quite good.

Run the numbers if you put 20% down ($10k). Your payment goes to $295 which boosts your cash flow to $255 per month. That's at least a 30% annual Cash on cash return.

Then assume you are putting 20% down and take a 30 year period. Debt service goes to $190 per month, cash flow goes to $360, annual cash on cash return goes to 43%.

I fail to see how these are bad numbers.

Medium logo blackBrandon Hall CPA, The Real Estate CPA | http://www.therealestatecpa.com | Podcast Guest on Show #196

Cashflow at 100% financing is an unlimited COC return because you put no money down. Someone else would still be covering the cost of your loans not you. Also, after a few years of income from the property and frequent payments you could probably refinance to a 30 year if your looking for more immediate cash flow. If not 15 years and the house is completely paid off and you're cash flowing 550+ rent price growth.

@Bily Elliott  

 almost Billy .  Remember the 50% rule is just a rule of thumb to help you screen properties.  The expenses cover all your expenses minus financing (PI)  .  so your should include Taxes and insurance  as part of your expenses regardless if you finance %100 or not

there are some good calculators and spreadsheet on the file share page to help you out as well