What do they mean by up to code? Has everything been updated or replaced to bring it to modern code or do they meet code because it's grandfathered in?
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.
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:
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?
I'd buy it. 2% is way too conservative in my opinion. Especially in my market. I'm with @Jeff Gebhart I would double check the currents rents for that market. Either way if the property is in decent condition as it seems it is I'd go for it. Start low and see what happens. Good luck!
@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?
I would say Yes, how much you put back should be higher because of the age of the home. Also, are you taking out for CapEx, vacancies, repairs, possible landscaping, taxes, marketing etc.
@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.
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. :)
Be sure to confirm the deferred maintenance that exists through your home inspection and verify your research on the area the home is in with a local realtor or local investor. To me the difference between a B and C class property is pretty large.
@Joe Fornasiero give us an update on what happens. Sounds decent with the information given. It would be impressive if you could get it for 55k. Not sure if they are going to want to come down that far but never know.
Joe - any update on this potential deal?
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.
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!