What to look for in duplex investing?

Question

Hello

I am fairly new to the investing world having just bought my first fourplex last year.  Recently the duplex across the street went up for sale and i am thinking how nice it might be if i could get it for the right price.  They are asking 365k and the one side that is rented goes for 1400 which includes all utilites for the tenant.  A potential lender told me if i put 10 percent down my mortgage payment would be about 2300 with todays rate and counting for pmi.  Just curious how good/ bad this deal is given there is still vacany rates, maintenance, cap ex, and other monthly costs to factor in.  How should the numbers play out in a duplex and what would be a good offer price to make deal worth while?

Michael Henry · Answer

@Nicholas Lehman I would say go by the 2% rule but based on the little information you gave and your location I don't think the rule works in this situation. It does not sound like a good deal.

Al Perez · Answer

I wouldn´t invest in an asset relying exclusively on appreciation. That´s big NO for me. Cash flow is what makes you wealthy. I don´t see any future in that deal Nicholas.

Shawn Ackerman · Answer

@Nicholas Lehman what is your real estate strategy?  I ask because this deal will be negative each month assuming the other side will also rent for $1400 per month.   If your not looking for cash flow and it's more of an appreciation play then go for it.

I would start offering around 80% of the value so if it's valued at 365K, 292K will be my starting offer.   Best of luck to you!  Persist and you will WIN!!!

John Leavelle · Answer

Howdy @Nicholas Lehman

The first thing I would do is verify what the Market Value is for a Duplex in that area.  The List price compared to the potential rental income ($365K vs $2,400) is not even close to the 1% rule.  Your proposed mortgage payment of $2,300 would only leave $100 to cover ALL other expenses.  The purchase price would need to be closer to $240K or rental rates would have to increase $625 per unit (not likely).

Get good comps to establish a reasonable Value and confirm the Rental Market rates.

This is a no deal to me as it stands.

Len Roche · Answer

The 2% Rule is just a rule of thumb. Depending on your area, the  1% rule may be used. If you are really serious about this property, check out the BP Rental Property calculator and run the numbers. (I.e. Closing costs, rehab costs, mortgage rate, monthly rent, HOA fees, property management fees, utilities, repairs, cap ex....).

Estimate these numbers using your current property and work out the Rate of Return. BP members typically go for 10% cash on cash ROR. Figure out what your current risk tolerance and financial goals and come up with a suitable target ROR based on other investments. If this property meets your target ROR then it's a contender. In addition make sure you are making a bit of money on the property. BP members typically go for at least $100 per unit.

Hope this helps,

Len Roche