Flipper/Rehabber · Jacksonville, FL · Member since 2015 · 105 posts · 26 votes
I'm looking at a duplex. 82k is the lowest the seller will go. The numbers make sense. The only thing I'm concerned with is that the property may not be worth 82k if you weren't looking at numbers - probably more around 65 - 76k (I'm still learning the market and RE in general, this is my first deal, so, it's hard to tell).
The property sold for ~115k during the 2006 high, and ~56k around '10. Beginning of '05 it was priced a few thousand above the 82k it's at now.
So as an investor, with a buy and hold strategy on this, would you buy knowing what the numbers are? What would be your reasoning for walking on this deal or closing?
Residential Real Estate Agent · Miami, FL · Member since 2013 · 195 posts · 138 votes
10y
a) You're doing 5% for repairs. I recommend more, particularly for a duplex. 2 kitchens, more bathrooms, more things that need fixing (and often rougher tenants).
b) I don't see CapEx. Sooner or later, you'll need a new roof. And new AC (2 of them, actually). You need to account for these things. That is another 10%, IMO.
You're doing 25% for repairs, vacancy, and management. I think, including CapEx, you need to be at round 37%.
c) That $190 monthly HOA is a deal killer. Eating up half your profits.
When you run the numbers again, with all this considered, I think you'll see it's a pass (for me, at least).
Wholesaler · Salem, OR · Member since 2016 · 31 posts · 10 votes
10y
Hi:
I have bought low end SFH in Jacksonville. They were priced at a 9 cap rate or better. While I am getting the income I have experienced very little, if any appreciation.
Unless I plan to flip the property I buy on income potential. Of course, the best is if it meets both criteria. You have to decide for yourself whether income or appreciation is most important.
Flipper/Rehabber · Jacksonville, FL · Member since 2015 · 105 posts · 26 votes
10y
Thanks for the information @Bill Jacobsen. Wondering, are you getting more or less than 1% of the purchase price in rent? I'm wondering how common it is to get rent like this in Jacksonville. If it's very common, maybe it's best for me to keep looking. If not, they I'll likely end up very happy with the cash flow.
Correct me if I am wrong but are you subtracting your principle payment from income to get NOI? I don't think principle should get subtracted, which would make your numbers look better.
That being said, the numbers aren't quite there, for me. I dislike 30 year notes. I try to get 12% CoC on a 15 year note.
Flipper/Rehabber · Jacksonville, FL · Member since 2015 · 105 posts · 26 votes
10y
@Jacob Sampson, Thanks for the reply. Yes I'm subtracting the full mortgage payment (P and I) to get Net Operating Income. The Gross operating income is without any debt service (P or I).
What's funny is the duplex numbers are better than the comparable SFH numbers I have in columns D and E, for which I'm using the 1% rule, which I've heard is a tough number to achieve. Do you usually hold out for something better than 1% rent?
When I plug in a 15 year loan I can still get a 15.6% CoC by self-managing the property, and without adjusting my interest rate which I would imagine would be slightly lower on a 15 year?
Just based on the numbers, and without knowing the area, it seems like a reasonable deal. It wouldn't be the worst I have seen on BP. It wouldn't even be worse than some of the donkey deals I moved on. You will likely end up reasonably happy with it.
I pay a maximum of monthly rent * 60, does that put me at around 1.4% rule? I don't really know. From what I see on BP there aren't a ton of areas where my numbers are even feasible.
Another equation I do for testing a property is rent - 30% (vac&main) - PITI (15 year note) = reasonable estimate of long term cash flow.
I am pretty conservative and more interested in protecting the progress I've made vs maximizing my growth. That is the perspective from which my opinions come.
Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
10y
What kind of loan would you get, if the appraisal doesn't come in? Since this is not big enough to be seen as a commercial property, they'll be looking at sold comps and won't give you a mortgage on something that appears to be 'under water'.
@Jacob Sampson, Thanks for the reply. Yes I'm subtracting the full mortgage payment (P and I) to get Net Operating Income. The Gross operating income is without any debt service (P or I).
What's funny is the duplex numbers are better than the comparable SFH numbers I have in columns D and E, for which I'm using the 1% rule, which I've heard is a tough number to achieve. Do you usually hold out for something better than 1% rent?
When I plug in a 15 year loan I can still get a 15.6% CoC by self-managing the property, and without adjusting my interest rate which I would imagine would be slightly lower on a 15 year?
Joe p&i are not operating expenses. NOI is gross income less v/c And only operating expenses. Financing is not accounted for. CapEx are also not operating expenses.
Investor · Rochester, NY · Member since 2016 · 477 posts · 426 votes
10y
@Account Closed Would you mind posting the spreadsheet you use for your evaluations? Seems like you really know your business and I wouldn't mind seeing how you view properties.
@Account Closed Would you mind posting the spreadsheet you use for your evaluations? Seems like you really know your business and I wouldn't mind seeing how you view properties.
Basically I've been doing this long enough to know my market. I look mostly to appreciation rate and rent growth. If I want to look at a new area I'll run numbers thru this 10 year investment analysis spreadsheet. Play with it and notice the difference a small change in appreciation rate or rent growth makes.
Flipper/Rehabber · Jacksonville, FL · Member since 2015 · 105 posts · 26 votes
10y
@Michaela G., this is my first property so forgive me if I don't understand correctly, but you mean in the case the appraisal is less than the loan amount I'm trying to get? I would probably cover the difference out of pocket, or use private lending at 5% with a 5 year pay-off.
@Account Closed, ah thanks. I have that mis-labeled then. What do you call your net after operating expenses and debt services?
@Michaela G., this is my first property so forgive me if I don't understand correctly, but you mean in the case the appraisal is less than the loan amount I'm trying to get? I would probably cover the difference out of pocket, or use private lending at 5% with a 5 year pay-off.
Let's say the appraisal comes in at 65K and you're planning to put down 20%, then they'll likely only loan you 80% of the 65K = 52K and if you want to pay more, than I believe you'd have to come up with the difference with more cash.
They would not lend you 80% of 82K, which would be 65K - which would be 100% of the value.
Rental Property Investor · Easton, PA · Member since 2013 · 357 posts · 92 votes
10y
Joe
What makes you think the duplex is worth < 82K besides the price history ? What is the current condition ? Since you listed $0 for CAPEX i assume it is move in ready ?
As Michaela said, the banks appraisal would look at comps more than property finances. Do you have any comparables in hte area ? what price and rents are they getting ?
ken
Investor · Fort Walton Beach, FL · Member since 2015 · 568 posts · 966 votes
10y
@Joe Henry Looks like a good deal on paper. How is the neighborhood? Since you ran some numbers with you living in it, I'm guessing it's at least a B neighborhood? From your numbers in the spreadsheet, you are looking to purchase this deal for 8.88 cap rate (i.e., you would make 8.88% on your money if you paid in cash). That's without saving any of your income for capital expenditures though. Most people here will suggest you put aside 5-10% of gross rent for capex.
Private money at a 5% rate is an amazing deal in itself. You can just fund the entire deal with that.
Flipper/Rehabber · Jacksonville, FL · Member since 2015 · 105 posts · 26 votes
10y
@Kenneth Hynes, it is move in ready. The comp my broker pulled for it used only other duplexes on the lot (it is a lot of several duplexes in a nice area of mostly SFHs). The comp said it was worth about 76k, and based on the level of finish i'd agree I think.
The thing that makes it appealing to me are the numbers. That's the only reason I'd go higher really.
Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
10y
@Joe Henry My 2 cents, I would never pay higher than the appraisal. If the seller wants $82k and the appraisal comes back at $75k, then negotiate the purchase price to $75k or walk away from the property (typically covered through the financing contingency). There are always many other properties out there.
Flipper/Rehabber · Jacksonville, FL · Member since 2015 · 105 posts · 26 votes
10y
@Tom S., thanks for the solid advice. I feel that's especially apt considering I'm still learning this market. It seems like a good deal, but I don't have 100% market knowledge.
Residential Real Estate Agent · Miami, FL · Member since 2013 · 195 posts · 138 votes
10y
a) You're doing 5% for repairs. I recommend more, particularly for a duplex. 2 kitchens, more bathrooms, more things that need fixing (and often rougher tenants).
b) I don't see CapEx. Sooner or later, you'll need a new roof. And new AC (2 of them, actually). You need to account for these things. That is another 10%, IMO.
You're doing 25% for repairs, vacancy, and management. I think, including CapEx, you need to be at round 37%.
c) That $190 monthly HOA is a deal killer. Eating up half your profits.
When you run the numbers again, with all this considered, I think you'll see it's a pass (for me, at least).
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
@Joe Henry, I would certainly suggest: don't ignore the property value. So what if it was worth more in 2006, and less in 2009 (for example)? You are looking NOW, when the market is saying it's only worth $76k. And you do realize, you should be trying to negotiate down, BELOW market value, right? It's not your concern if the Seller owes $82k on it and doesn't want to settle for less.
Why so callous? Because it will be YOU that is taking all the risk from here on out! What will happen to YOUR exit strategy if/when the economy goes south again? Try selling it for what you paid for it in two years time, when the market THEN says it's only worth $55k - again?
Will your future bargain-hunter Buyers care about your buy price? Cheers...
Wholesaler · Salem, OR · Member since 2016 · 31 posts · 10 votes
10y
Joe:
You asked, " what % was rent of my purchase price. It ranged from 1.5% to 1.8%. This is very high for me and I don't get that in other places across the country.
Just a comment. When we are estimating cap. rates and other metrics we are including numbers we know down to the penny as well as others that are complete guesses. Be careful how you use them.
About capital expenses. I have found that they are not related to the amount of rent but more related to the size and nature of the building. This is also true with maintenance.
Flipper/Rehabber · Jacksonville, FL · Member since 2015 · 105 posts · 26 votes
10y
Thank you for all the advice everyone. I think I will end up passing on this deal. It may be a good deal for the market, but I just don't know that for sure yet. I'm going to spend some more time learning the market and property values so I can find a deal that will make me money going in, instead of banking on a buy and hold with close numbers.
Thank you for all the advice everyone. I think I will end up passing on this deal. It may be a good deal for the market, but I just don't know that for sure yet. I'm going to spend some more time learning the market and property values so I can find a deal that will make me money going in, instead of banking on a buy and hold with close numbers.
I think this is the smart way to go... I've had a couple of REI opportunities brought to me since I started learning what REI looks like for me; I've turned them down as I am still learning and figuring out where I am going to be exactly.