Can't Decide on First Duplex - Deal Analysis Help

4 Replies

UPDATE: Admin please delete other topic/subject line. 

Hello all! So I'm in a bit of a fix. For the past few weeks I've being trying to figure out what to deal about getting my first duplex. The problem is...I'm only qualified for less than $130K for a conventional loan due to my income and lack of assets (I have no savings). As a result the only place I can really invest in right now is North Minneapolis, which is considered the bad part of the City. BUT I have two properties I am considering right now in the Webber-Camden neighborhood, an area considered safer than the lower parts of N. Minneapolis.

Thanks for the help!! I think that Property #1 is the best bet overall...just no garage. Killer. I've estimated that I might not have a tenant for five months (not in actual calculations or vacancies), considering winter is right around the corner. I currently pay $580 for my studio apartment (which just went up by $30) and roughly $20 for electricity. Not sure if my budget can survive 4-5 months with +$500 extra costs...currently only make $27.5K a year.

Overall my main concern with the below information is...how can I survive without a tenant? Besides picking up a part-time job or something. Should I just save and wait until Spring or move forward with the opportunity?

PROPERTY #1

One property is a SFH converted into a duplex. Beautiful home. New roof, working fireplace (downstairs unit), hardwood floors in the downstairs unit and basement (no washer/dryer though). Everything looks like its in excellent condition (no damage, visible mold, smoked units, etc). 2BR/1B for the main floor and 1BR/1B upstairs. Both units vacant; lower 2BR was rented out at $950 and upper 1BR was rented out at $750. Built in 1936, 1 ½ stories.

The kicker? NO GARAGE! Which is a real deal-breaker for me. The reason being is because I have a crime prevention business and I plan to get my car wrapped. Parking a car that has any essence of crime prevention attached to it will result in massive vandalism…so big no-no. There is a space behind the building to build a garage, but I don’t know if it would be big enough or be allowed by the City. I called them on Friday and am supposed to hear back by the 24th. For additional info, the crime maps show that there was a murder right across the street in May…

So all that aside, here are the #s:

Asking Price: $110,000 (dropped from $125K)

Offering Price: $90K (based on lack of garage, seller’s expediency, past murder, vacancies and upcoming winter, as well as what I can afford to pay per month)

Rent: $950 (once rented); Annual = $10,830 (5% vacancy)

Operating Expenses:

Water/Garbage - $1380

Gas - $106 (altogether; split between two units)

Electric (separate meters)

Insurance - $1500

Property Tax - $1,666

Repairs (if needed) - $1600

=$6252

NOI:
=$1998 Annually

Debt Service:

$7104

Cash Flow:

-$5106 or -$425.50 a month

As owner-occupant:

$592 – MORTGAGE

Utilities – $375

$6 + $150 + $139 + $86 + $50 (electric; estimated)

$1017 a month…doesn’t include repairs

PROPERTY #2

The second property is different. It is an up/down duplex. Asking price is $99K. Upper unit was renting for $750 and lower unit was renting for $720. 2-car garage, very safe area. Owner pays water, trash, snow/lawn. Tenants pay gas and electric. 2BR/1B per unit, both vacant. 2-car garage with driveway (BIG PLUS). Built in 1906. 2 stories. The one big problem? The upper unit is fine, but the lower unit…former smoker lived there. It would have to be cleaned up before renting, so I’m sure the price reflects that. No telling how much that will cost to repair. I don't have any costs from the seller on utilities, so I had to estimate.

Asking Price: $99,000

Offering Price: $85K (based on smoked unit, vacancies and upcoming winter, as well as what I can afford to pay per month)

Rent: $850 (once rented); Annual = $9690 (5% vacancy)

Operating Expenses:

Water/Garbage - $1200 (estimated)

Gas – $50 estimated (separate meters)

Electric – $50 estimated (separate meters)

Insurance - $1500

Property Tax - $1522

Repairs - $3000 (estimated)

=$7222

NOI:
=$2468

Debt Service:

$6708

Cash Flow:

-$4240 or -$353 a month

As owner-occupant:

$559 – MORTGAGE

Utilities – $563

$100 + $150 + $127 + $86 + $50 (gas, estimated) + $50 (electric, estimated)

$1122 a month…doesn’t include repairs

@Ulrich Faircloth

I'm not sure how you're running your numbers, I came up with a different NOI, but either way, I don't think either property is really a good investment for you and I would save up until spring or find a much better deal, preferably in a better neighborhood.

My primary concern is your admitted lack of operating capital. To answer your original question, you can't survive the purchase without a tenant. This often leads to new landlords accepting a tenant they shouldn't and subsequent problems. The tenant pool in lower end neighborhoods are inherently more risky and can lead to higher vacancies and a higher chance of a trouble tenant. 

Additionally, the one thing you can't change about the house is the location - finding something in worse condition but in a better neighborhood at least affords you the opportunity to repair the house and end up with a superior product. 

-Christopher

@Christopher Brainard

Thank you for your reply! Much appreciated. I ran the numbers as an owner-occupant rather than having both sides rented out. Probably messed up on the numbers somewhere. 

Property #1 would have been great. Just found out yesterday from the City that they would allow a garage to be built, but no temporary garages (e.g. carports) were allowed. So that defeats the purpose altogether. Can't park a branded vehicle on the side of the street and expect nothing to happen. 

Completely agree about the location though. It's a safer part of that area in the city, but farther away from downtown. Would probably be more difficult to find quality tenants just for that reason. I feel like it will be years before I'm able to even invest though, because I won't be able to get qualified for more than $130K because of my income. Once I quit my job and become fully self-employed I'll most likely have to wait at least two more years to re-qualify for a mortgage. And unless I'm making more than $28K there's no way I'll get anything higher. Properties in "good" areas around here will cost you at least $160K+

If it weren't for the temporary garage issue and upcoming winter I'd be willing to take the chance without cash reserves. But with winter coming up I just don't see how it would work. Would love to buy a rehab in a good area for cheaper, but wouldn't even be able to afford it. Nor do I have "cash" to buy one anyway.

My question at this point is, as someone with little money what can I invest in besides real estate at this point? I don't want to wait years to cash out on a CD or bond. Don't really have money for stocks either.

-Ulrich

I did not do the numbers on the property but if your budget can't handle not having a renter until the end of winter I would wait. I Have a property right now I am finishing up rehab on and its a big push to have it rent ready by the end of September for a 1 Oct move in date. In my experience around here it is very hard to get new renters in Nov Dec and Jan I think mostly because of the holiday but where your at the harsh winters are another reason for people to not want to move. It also never hurts to have a little extra savings for any unplanned expenses. 

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.