Charlotte, NC · Member since 2014 · 26 posts · 3 votes
Hi everyone, i'm just about to close on a duplex investment property i've been looking at for a few weeks and I wanted to get some feedback on what everyone thinks, here are the details:
Property: Duplex, both sides are 3 bed/2bath, good area (close to downtown, shopping, good schools). Zipcode 28270 in Charlotte, NC
Price: $275k (originally asked for $325k)
Loan: Putting 25% down (yikes!), including taxes and everything, total monthly will be about $1400/month (includes maintenance)
Currently rented: $1925/month total (950 on 1 yr + 975 on month to month)
Both sides haven't been updated since 1988, so it doesn't show well, but structurally, it's perfect. Also, I think since it shows so poorly, that the rents are super low. After it's updated, I think we could get in the $1100 to $1300/month range for each side. Both sides could probably use about $5 to $8k to make them look good.
You should still factor in 10% for property management, even if you plan to do it. At some point in your life you will want to get out of managing properties and at that time you don't want your cash flow to disappear just to pay a property manager. Logan is also right, homeowners insurance on a duplex is higher than a SFR. My broker quoted me $600 a year when estimating my monthly payment, and when I called around it was a totally different story. More like $600 per unit, depending on where you live. Also you still need to budget for capex because you property isn't just updated once and is good forever. Every major system in the home has a limited lifespan.
It's good to post your analysis on here and get feedback from others. You will learn a ton and also save yourself for headaches in the future. I wish I was on BP before I bought my first property! Best of luck.
If you think that you prop taxes are high, that same 300k property in DFW is about triple that. Average rate is 2.5% of assessed.
I don't think my Prop taxes are high at all. I was mentioning the prop taxes for the OP. He has $3k+ listed on the duplex at an ARV of which I would assume is about $300k. Sounds about the same as y'all down south :)
Prop taxes are the bane of my existence. Same reason I stay away from downtown metro areas with GSD (General Services Dist/Urban District) tax rates. It just eats away at ROI.
Charlotte, NC · Member since 2014 · 26 posts · 3 votes
11y
wow, lots of good feedback, thanks - glad I went through this exercise
@Logan & Kim
*For insurance, I estimated $50/month, it sounds like i'll have to increase that (i'll bump it to $100/month)
@Gabe
*For the operating expenses, instead of saying 50%, I grouped it a little differently. For taxes, insurance and P&I, that's all included in the $1400/month expenses. For vacancy, I estimated 1 month, so I took that out of my ROI calculation. I would say the appreciation on the place would be maybe a hair higher than normal - maybe 3 to 5% max. Thanks for bringing up the PM portion, i'll have to include that down the line.
@ Issac
I have no idea on that part - i'll bring it up during the due diligence period
@ Steve
For the interest rate, yes I have it 4.25% (my wife works for wells fargo, we get a minor break). For the insurance, a lot of people brought up that $50/month is low - i'm going to increase it to $100. Your property tax amount is awesome! Our's is relatively low, but higher than where you're at. The last tax bill they paid was $3500 at an assumed value of $287k. I bumped it to $3750 to be safe.
This is a great thread....a lot of input. The muti-family properties are tricky. Have you read any books on how to value them?
In my experience, I have found on nearly every multi unit property I've seen for sale, the seller had no idea at all how to calculate cap rate. They pull some number out of the air, and then put a pricetag they want. Given all the good advice here, calculate a purchase price based on net income. Don't take their number. Start from the current rents and subtract all expenses to get to a yearly net income. Then set the cap rate you want to get...say 7%. Based on your numbers, the cap rate looks extremely small. Don't be tempted to base it on what it would rent for fixed up. Base it on current rents.
David's point is what I've been saying all along. Value the property on its current income stream and associated expenses and back in to your purchase price using any your preferred return metric. ie total COC, COC return, COC/door, IRR.
Caprates mean nothing in 1-4 unit properties. Look more at GRM and comparables to see what others are willing to accept. That doesn't mean you move to that level because everyone else is.
Charlotte, NC · Member since 2014 · 26 posts · 3 votes
11y
thanks again for all of the feedback everyone, let me ask just two more questions;
1) what would you assume is a fair purchase price at the current rental rates (1925/month income, must put 25% down, assume 100/month for insurance, maybe 200/month for maintenance, 100/month for PM, 3750 for taxes, maybe 5k to 8k in rehab cost per side)
2) what would the rental rates need to get to in order to justify a 275k purchase price? (We're currently at 950 and 975 for the two sides, I think fair rates are in the 1100 to 1300 range)
Rental Property Investor · Raleigh, NC · Member since 2012 · 56 posts · 23 votes
11y
Peter,
Fair value for duplexes and good income producers are two separate things. Duplexes are valued on comp sales and not income generation, so if the rehab costs aren't too high you may be paying a fair market price, even if it doesn't cash flow very well. It sounds like your duplex is in a good A or B+ class area, as the rents are decently high and you'd be paying up for the location.
However, you are not buying the best investment for your money. With vacancy and repairs included, you're likely to get a single-digit cash flow rate of return. Do not assume appreciation in your calculation, as it's beyond your control and the 6% broker commission will eat a chunk of it. Do include the principal paydown, though.
In metro areas of NC, your solid cash flow investments are unlikely to be in areas where unit rents are $1k+ per month.
You have gotten a lot of great advice on what to expect with expenses and evaluation.
Question number 1 is a good question. Question number 2 (imo) might not be.
You should never be offering a price on what you can get if you change anything. The seller should get a fair price in correlation to what he brings to the table. That being said, I would never offer him a price based on how I could improve a deal. I should be the one getting paid for my abilities, not him. He should get paid fairly for the deal "as is".
There is the idea (fact) that you use more of a fair market valuation to determine a price for a duplex based on comps rather than a cap rate calculation. While I understand it, I never do that for myself. I'm in the business of making a certain percentage on my investment and couldn't care less what someone else would pay for a deal I'm looking at. Because I am not a speculator on appreciation, but am a cash flow investor, I always make my decisions based on a percentage yield or cap rate regardless of what others think about it. So, the only questions I would be asking are:
"What is it worth in the condition the seller is giving it to me with the rents AS THEY ARE?" My offer is congruent to a cap rate of my choosing relative to these facts.
and
"How can I add value, for which I will be paid?" My offer is CONTINGENT (in my mind, not in the contract) on my being able to live with this answer.
So, I would not ask the question "What do the rents need to be to justify the sellers price?" I would only ask the question, "What price can I give the seller based on HIS rents?"
Charlotte, NC · Member since 2014 · 26 posts · 3 votes
11y
Just want to give everyone a quick update on this one.
We closed a week ago with a final purchase price of $275k. Our inspection report came back with about $15k worth of repairs and the seller completed all of them. Our mortgage is on $206k and with taxes, insurance and everything else our monthly comes out to $1375/month (not including maintenance/pm - we'll do that ourselves)
Now for the best part - as suspected, one renter hasn't had an increase in over 4 years and the other hasn't had an increase in over 8 YEARS! Market rate for rents is confirmed to be $1400/month on AVERAGE and they both pay under $1k/month.
So, for today we have cash flow of around $550/month (1925 rent - 1375 mortg) which nets us about 9% on our $70k investment just from a CF perspective. Within the next 6 months we'll increase it to $1200/month for each side. This would net us $1025/month which gives us a return of 18%. Then a year or so after that, we'll get it up to $1400/month per side, which would net us $1425/month, yielding an 24%!!! (I think i'm really starting to enjoy real estate investing!)
i'd also like to say thanks again to everyone that gave me some input on this project. It definitely helped me look at it from a different perspective and the feedback helped out a ton.
Charlotte, NC · Member since 2014 · 26 posts · 3 votes
9y
Wanted to give everyone one more update on this one -
Slowly raised the rent on both of the tenants to about $1200/month. One of the tenants decided it was time for her to move on. We renovated that one unit from top to bottom for about $13k all in. We put it on the market at $1800 before we 100% finished and we had people literally lining up to see it! I didn't realize how much demand there was for rentals like this. Within one week we had a family move in (they were both doctors) and they've been perfect.
The other side is going to get the same treatment as soon as he moves out. I sent him an increase notification letter for the end of Q1CY17. Assuming everything goes to plan and we land a similar tenant, we'll be bringing in $3600/month. Putting funds aside for cap ex (~$500/month) and $100/month for lawn maintenance and $1400/month for the mortgage - we'll take home $1600/month before taxes.
$70k down + $26k (2 sides @ $13k each) = $96k out
$1600/month * 11 = $17.6k in
18% CoC
This one turned out great for us, hoping we can replicate this a few more times and i'll retire! If there's any bit of advice I'd give is to trust your instinct. I'm grateful for the input recieved on this thread, but not everyone was telling me to go for it. I trusted my gut and it turned out pretty good.
Congratulations and thanks for updating us. I have been on the sidelines for a while now and would love to pull the trigger on a duplex or triplex near me as well.
Any advice on finding something (MFH) not on the MLS?
Charlotte, NC · Member since 2014 · 26 posts · 3 votes
9y
Yes, BP! BP has tons of resources on how to find off market properties. The few that I can remember are to (drive for dollars - look through streets you would consider that have been neglected, tell friends/family you are looking for property, send out yellow letters, go to your courthouse and see whats up for auction, tell your realtor you're looking for off market properties, find a wholesaler, etc.). I found this particular property through the MLS, but the future properties I've been looking have come from that original seller actually.
There's a lot of different ways to find non MLS properties. One thing to note is that people are always looking for the easiest method to accomplish a goal (ie. use MLS). I personally don't look at the MLS anymore, because I know that's where most people go and I'll find the most competition. Taking a different path can potentially yield more fruit.
Charlotte, NC · Member since 2014 · 26 posts · 3 votes
7y
BP Family - Wanted to give one more update on this one. It's been a while, but a lot has happened. To make a long story short, we had both sides fully updated ($13k each side) and both rented out ($1850 each side). Our cash flow was fantastic, but about 6 months ago we had an offer to buy it outright at $435k vs the roughly $300k we had into it.
We cash flowed really well from start to finish, but at the end of the day, we couldn't resist a +$100k appreciation gain before taxes.
Thanks again to everyone who helped out with advice along the way.