Need help analyzing my first duplex deal

10 Replies

Dear BP Community,

I am looking to invest in a duplex – live in one side (with a roommate), then rent out the other side. I am currently analyzing a deal in my area and would like the BP community to council me. Here are the numbers:

List Price: $184,950Estimated P&I: $826.55/mo

Estimated PMI: $81.80/mo

Taxes:$2617/yr

HOA: $0 (there isn't an HOA)

Estimated Insurance: $1017.23/yr (will get quote from agent soon)

Loan Type: FHA

Down Payment 3.5%

Interest Rate: 3.75%

Unit 1 (4 Bedroom) Rent: $1070/mo (currently leased until July 2016)

Unit 2 (3 bedroom and bonus room) Estimated Rent: $1070/mo

Estimated Monthly Maintenance Expense:10%

Estimated Monthly Vacancy Expense: 10%

Estimated Monthly Capital Expense: 10%

Estimated Monthly Property Management Fee: 0% (I’ll manage it)

Estimated Rehab Costs: Less than $3000

According to Rentometer.com, the rental rate of Unit 1 is $125/mo below the median rent of the area, and Unit 2 is at the median rent of the area. I plan to verify the local rates using more credible resources.

I drove by the place yesterday. There were no obvious issues with drainage from improper landscaping, the roof is in decent shape, and adjacent property owners are keeping the neighborhood neat and clean. There weren’t any eye sores or ugly houses in close proximity to the property in question.

Because I don’t plan to live in the duplex for more than a few years, I applied the 1% Rule and 50% Rule as if I weren’t living at the property, and here’s what I found:

If I had two tenants, one in each unit, this property would meet the 1% Rule because gross income will be $2140/mo, which is greater than 1% of the purchase price ($1849.50/mo).

Also, the 50% rule would be met because $1070 covers my mortgage and P&I (estimated at $826.55+$81.80=$908.35).

***Now for the tricky part***

I want to have positive cashflow on this property after factoring in conservative estimates of all expenses (e.g., 10% estimated monthly maintenance expenses). So my plan is to get a roommate to live in the 3 bedroom (plus bonus room) unit with me. I may be able charge him $662/mo in rent. That way, I still come out with more than $1.00/mo in positive cashflow.

But when I applied the 1% Rule and 50% Rule assuming I won’t personally pay a dime out of pocket for rent, my property doesn’t pass either rule.

Please let me know what I did well/didn’t do well on my analysis of this deal. I’m very new to the real estate investing scene and appreciate any constructive feedback. Please also let me know if I should be at all concerned about meeting the 1% Rule or 50% Rule when analyzing the property without me having to pay a dime. Thanks in advance and let me know if there is anything else I need to clarify. -Edward

Originally posted by @Justin Tahilramani :

@Edward Stephens - How long has this property been on the market? Your calculations are based on "list price". You can easily offer 10 - 15% lower than asking price. How old are the units? 

Good question. It's actually not on the market yet! I talked to the agent and he believes they'll be listed on the MLS in a couple weeks. The age of the units is unknown, but they are at least 15 years old by the looks of the outside and surrounding properties. I'll have to ask the agent tomorrow.

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Originally posted by @Justin Tahilramani :

@Edward Stephens - How long has this property been on the market? Your calculations are based on "list price". You can easily offer 10 - 15% lower than asking price. How old are the units? 

 The units were built in 1972.  Is it a rule of thumb in real estate circles to offer 10-15% below the list price?  I wasn't planning to offer full price, but I'd like to know if the 10-15% Rule is widely used.

Don't worry about list price. Worry about cash flow that you can live with and comps. Seems like a descent deal and very similar to my personal house hack. Double I paid 174k for and rents are $1200 a side now I've moved out. The most important thing about this deal is you are getting started. Most folks don't do that. Get a good inspection and budget accordingly. Good luck!
Originally posted by @Josh C. :
Don't worry about list price. Worry about cash flow that you can live with and comps. Seems like a descent deal and very similar to my personal house hack. Double I paid 174k for and rents are $1200 a side now I've moved out.

The most important thing about this deal is you are getting started. Most folks don't do that. Get a good inspection and budget accordingly.

Good luck!

Thanks, Josh! I appreciate the encouragement. My lender did mention that I'm subject to much more strict inspection criteria because it's an FHA loan. Do you (or does anybody) have any experience with FHA-type inspections?

You think too much.  Looks like a good deal.   Go for it! You cant go wrong following that 1% rule,etc,  and property in decent shape.

#s look decent and #s seem to support that you can rent 1 side for $1050-$1200 (which will cover your total expenses, minus utilities).  Then u live in the other side free....obviously this does not factor in vacancies, repairs etc.  So you need to calculate those #s in at 5-10% of monthly rent to be prepared when you have a vacancy & repair needed.  When you decide to move out and rent the 2nd side you will have cashflow....plus each month you are in the property your mortgage is getting paid by Unit 1....so your equity will hopefully grow.

I think you should be factoring in a rent amount for yourself since you would have to live somewhere and pay rent somewhere so why aren't you paying it here?  I think you could figure you and your room mate are paying the same $665 a month and figure that as imcome.  Then you are fine and you more then meet the 1% rule.  You will also reap a tax benefit and pay less on your day job in taxes.  In addition you will be paying down principal and hopefully you will be appreciating 1% or 2% a year