$495/mo in cashflow. Am I missing anything?

27 Replies

I've recently found a duplex that I'm interested in purchasing the list price is $69,000 but I believe I could purchase the property for $60,000. Current rents at $600 per unit totaling $1200/mo. The tenants are up to date on rent payment and have both lived in the property for 5 years. The home was built in 1925. I was informed that all systems (electrical, plumbing, etc) are up to code and the home is in good condition. The home is in a B/C class neighborhood 1 mile away from a very large employer and 3 miles from a college campus. Based on the 50% rule I would cashflow $375/mo with PM and $495/mo if I self manage. (20% down) Does the maintenance percentage change with an older home like this? I want to make sure I'm evaluating the property properly.

I would imagine that a house that old has had several renovations done to it. Just make sure you have an inspection contingency (always have an inspection done). What are you currently using for a maintenance/capex reserves? I would definitely increase your %, especially if it hasn't ever had an overhaul (updated electrical, HVAC, roof, etc)  

You can find a lot of these out just by asking the owner prior to even paying for an inspection. If you find that a lot of these things haven't been updated in a long time from the inspection, you can use that as another bargaining chip to get the seller to reduce the amount since you're going to need to update them at some point in time.

Drew Castleberry the HVAC is all relatively new within 10 years old, water heaters 4 years old, electrical has been replaced, and plumbing has been updated to copper. The home seems to be in good shape and could use some slight updating (kitchen cabinets, floors, paint) I was using the 50% rule when determining the cashflow but would most likely manage the property myself as it already has tenants

The 50% rule is a good quick evaluation tool.  Now it's time to break it down and line item each expense in your locality to make sure it's actually true.  BP has some quick and easy calculators to use which will also help you determine what numbers you should be looking at.

I think you could get more specific. Look up the property tax for the property (usually found online). Find out the insurance cost (could get a quote or ask the seller). Do you pay for water? Electricity? Etc? Cash flow will change by the month affected by repairs, vacancies, and other things. 
Here's a link to one of many rental calculators:
http://www.goodmortgage.com/Calculators/Investment...

Nicole W. - Thank you for the link. After further evaluation with an offer price of $50,000 I get the following: Monthly rental income $1200 Taxes-$187/mo Vacancies @10%- $120 Maintenance @10%- $120 Capex at 10%- $120 Insurance- $100 Water/sewer/trash- $60 Mortgage P&I @ 20% down- $222 This puts my total cashflow at $271/mo. Does this still seem reasonable for a duplex? From the research I've done most people expect $200 per door on a duplex

Joe,  

You recently included most of what I thought you were missing in your original post.  However why are you paying water/sewer/trash?  Unless you can't break that out because of meters (water/sewer)?  I would at least make tenants pay trash if you can't break out the water.  Also, not sure what market your in but $600 per unit seems very low if in a college rental market.  That may be your biggest/easiest value add is increasing rent.  What are comp rents in the area?

Good luck!

Jeff

@Joe Fornasiero - You stated that the HVAC was replaced about 10 years ago, which means that you should be expecting to replace them within the next 1-3 years. Sure - they may last 5-7 more years, but you always have to plan for Murply. Two HVAC's will easily set you back 8-12k.

How does the roof look? Thats another big ticket item. 

Also, 187/month on taxes seems really high - is that correct?

Jeff Gebhart the current landlord pays water/sewer/trash the tenants are month to month so I can change the contract quickly. The rents are also low for the area. Comps seem to be going in the $800 range. That said, the home is slightly outdated. Everything is functional but it could use some updating to generate higher rents. Justin Tahilramani I have a family friend that I use to get good deals on HVAC's I would expect to pay around $6000 for both. The roof is in pretty good condition and about 8-10 years old based on the sellers disclosures. The $187/mo is correct. Total taxes come out to $2,245/year. I believe those should come down if I can pick the property up for $50k

@Nathan Patterson in one of my posts above I called out what I was factoring in for capex, maintenance, etc. I used 10% capex, 10% maintenance, 10% vacancies. Taxes at $187/mo (actual) I have several options for marketing that would be very low cost (if any) which I would do myself. The property has also been rented out for 5 years so turnover seems to be very low. That said, I still used 10% vacancies as a worst case scenario.

I like this deal as well.

For us, the most important criteria is the exit strategy. If things go bad, and the property needs to be sold, can you sell it quickly? It sounds like, due to your discount, you'll be getting about 13% equity in the deal on day one. You ought to be able to sell the duplex for under market value and still come out on top. That is a good exit strategy in my book.

@Jonathan Towell if I can pick it up at my offer price I don't believe I should have any issues getting rid of it. The property was initially listed at $75,000 two months ago and reduced $6,000  to $69,000 a month ago. It's an older couple trying to unload the property. When taking into account the taxes and the fact that the property could use some updating I believe I would need to pick the property up for $50-55k I won't go any higher than $55k as this would be my first investment property and I don't want to make the mistake of overpaying. I'm planning on submitting the offer today.

I like the deal.  Good price for the rent, and you can increase the rent relatively soon.  Now, go negotiate from $60K down to $55K or even $50K and make it a homerun.

Good find!  

Sounds like you have a lot of the items thought of.  I would go for it. Make the offer and do your inspections and vetted it out from there.

Yes, I think you are missing something.  In my area you could take $60K and buy 5 very nice mobile homes and net $400 per month each.  But, you would have to like the mobile home business and you probably couldnt get a loan against the mobile homes like you can with your duplex.  I might be a little biased when it comes to investing in mobile homes. :)

@Tom S.  

My lender was on vacation so my updated preapproval letter was delayed. When I went to put in the offer someone else had put one in that morning and it was accepted. I'm keeping an eye on it in case the deal falls through. I'm also curious to see what the final selling price is vs my calculations. If anything changes I will update the thread.

@Joe Fornasiero

Yeah keep an eye on it because deals fall through all the time.  Be sure to ask why, as they have to disclose it if something was found regarding the property.  

A property I was following once fell through, and when I asked why, it was disclosed the property is in a flood zone.  For me, it substantially altered the numbers and I passed on making a new offer.  Flood insurance for non-occupants (rental properties) can be quite expensive!