I need help running numbers on this duplex.

8 Replies

Hey BP, Need a little help here

Let me know what you think of my numbers.  Am i leaving anything out and would you guys go for this deal or turn it down and why?

I have a duplex under contract in East St. Paul MN that I would like to rent to section 8.  Section 8 will pay $970 a month for a 2 bedroom unit.  One of the units is a 3 bed but to be safe ill just keep it at the 2 bed price

Here are the #'s

Purchase price = $85,000 Down payment (25%) = $21,250 Rehab = $25,000 Closing = 3000 ARV= 115,000 - 125,000

out of pocket expenses = $49,250

Total investment = $113,000

Gross monthly income = $1,940

Monthly expenses:  Utilities = 400   Vacancy (10%) = 194   Insurance = 100   Property tax = 167   Maintenance = 200  Maintenance reserves = 200  Management (myself) = 100   Principle & interest = 328

Total monthly expenses = $1,689

Monthly Cashflow = 1940 - 1689 = $251

Annual gross income = $23,280   Annual expenses = $20,268   Annual cashflow = $3,012

Cash on cash return = 3012 divided by 49250 = 0.061 = 6.1%

ROI = 3012 divided by 113,000 = 0.027 = 2.7%

Using the 50% rule this works 1940 / 2 = $970 - P&I $328 = $642

Using the 2% rule this works 1940 / 85,000 = 2.3 % or would i use 1940 / 113,000 which almost meets the 2% rule at 1.7 %

Thanks Guys!

Jon - Yes, you would use the $113K with respect to the 2% rule. You have include all your costs including purchase, closing, rehab and anything else that goes into it.

@Jon Rylander  are you familiar with the area? I would guess your actual cashflow would (or should be) higher, however I personally wouldn't do the deal for two reasons. 

First, I don't want to invest in East St Paul. If you know the area and know what you are getting into, no problem. It's just not for me. The numbers look good on paper, but the hassle factor is a very real consideration. You can certainly make good CoC in tougher areas, but realize it will take more of your time to manage.

Second, your all-in cost is estimated at $113k, but your ARV is $115-125k, So you are taking all the risk of the rehab to get what? No additional equity, possibly losing money out the gate if there are surprises, and you will further tie up more of your cash - unless you are using a HML and planning to refinance out.

If you want to hold this forever (yes, really, forever), and are ok with the cashflow and additional management headaches maybe it is a deal for you. I would imagine it will be hard to get any real appreciation out of this, and difficult to sell. Also, $400/mo in utilities? Wow, is nothing separated that you can pass on to the tenants?

Hi @Jon Rylander ,

Are you experienced and/or fully educated on landlording with section 8 tenants?  If the answer is no, then I would strongly consider passing.  @Dan B. brings up a good point about the hassle factor.  There is much more to this business than numbers.

I'm not saying not to do it, mind you.  I just want you to be sure you are fully prepared so that you don't end up regretting your choice.  Plenty of people do very well with section 8 in rough areas, it just isn't for me.

Happy investing,

Mike

The main problem I see is that you're getting no equity spread for taking on the rehab, only risk. Why not just buy a place next door that doesn't need the rehab for $113k and rent it out? Less risk, same reward. 

thanks for the input guys. @Dan B. @Michael Germinario @oren karp No I am not an experienced landlord but I have a pretty good understanding of the hassle factor. My  girlfriends brother is a property manager and has made me aware of the hassles. Yes the utilities could be paid by the tenants and from what I understand section 8 would subtract a fixed amount according to what utilities the tenant is responsible for so yes my cashflow would be higher. I try to be really conservative with my numbers so when that surprise comes up (notice I said when and not if) I will have some extra funds. 25k for rehab is the worst case scenario. Thanks again for all the help

$970/month for a 2 bedroom voucher seems like a lot. I know my county in PA, Bucks County, lists a max value of $1350/month for a 3 bedroom voucher, but that includes utilities. So for the two 3 bedroom SFH's I have section 8 tenants in I get $1100 and $1125/month respectively.

Make sure that $970 is what you will actually get paid, not just the value of the voucher.      

@Sean O'Connor

 $970 a month was the standard w/o utilities.  So if the tenant pays utilities then would section 8 deduct a fixed amount every month from the $970?  one of the units is a 3 bedroom so i figured if i ran the numbers with both units being two bedrooms I would have some wiggle room.  Do you set your own rent amount and if it fits within the voucher then thats what they will pay or does section 8 have full control of what the rent amount will be??

This will be my first rental so sorry for the newbie questions