I have a friend who is considering purchasing a duplex in Dallas TX. He refuses to budget for vacancy and capex. I'm trying to convince him to be more conservative but am having a hard time since I really don't have much experience, so I decided to turn to the collective wisdom of the nice people of biggerpockets. In his defense, this is my first analysis, so please let me know if I miss anything.
Here's the deal as he wants to do the analysis, any input is appreciated:
Listed Price: $360,000
Square footage: ~2500
Bed/bath per unit: 3/2 for both
Current rent: $1375 and $1300
Monthly taxes and insurance: $525
Estimated monthly mortgage payments on $288,000 30 year loan (80% LTV): $1500
Estimated monthly maintenance costs: 5% of gross rents ($134)
Vacancy rate: 0%
Garbage/heat/lawn care: 0 (not sure if tenets pay these. Is it realistic to push these off on tenets? If not what are average costs for this area?)
Total monthly expenses: $2159
Monthly cash flow: $516
Cash on Cash: 8.6%
We don't have actuals on expenses yet, so for now we're trying to hammer out a good estimate.
I believe tenets pay electric/water. They are long term tenets and he would plan to keep them and maybe increase rents slowly over the next couple of years. Let's just assume he pays full price. I'm concerned with the deal because the expenses he assumes are low especially since he plans on keeping the property for 20+ years. Additionally the property yields negative cash flow with the 50% rule.
Does anyone have any thoughts on this?
To be honest, this is a terrible deal (even at $3,000 a month in rent). Does he plan on using property management? If so, add another $200+ a month for that. You really need to add capex and vacancy rate into the equation, unless nothing ever goes wrong with the property and never has a vacancy (chances of that are slim to none). The numbers I run have him losing a few hundred a month, so I would tell him to run! I've seen deals much better than this. I know it's a hot market (especially for multi-family) but I personally think he can do better!
@Greg Routen Thanks so much for the reply, Greg. We're trying to be safe and not get into a bad deal here so I appreciate the input. If you don't mind, could you elaborate at all on your analysis? What exactly are we missing out on? Any info would be helpful.
@Andrew Sampino Below are just ballpark numbers to give you an idea. I added 6% for vacancy, 6% for capex, and 6% for repairs. I also included 8% a month for property management. He might manage the property now, but does he really want to for the 20+ years he plans on holding it? As I said, just ballpark numbers and going off what you provided.
The capitalization rate for this property, according to the given, incredibly optimistic numbers comes out to 1.43%.
I would not think about it seriously.
Is your friend in Dallas or Connecticut?
Personally I love Texas but would invest elsewhere if I was going to invest remotely. I also would never invest remotely without property management.
I would not do this deal, it’s not a great return on his invested capital.
Thank you everyone for the responses, it is much appreciated. It was also quickly pointed out to me that I don't know how to spell tenants. Very embarrassing! My apologies.
You illiterate buffoon! How dare you offend our eyes so?
Andrew, in another life I was an English teacher. I knew a whole lot of other English teachers who took enormous pride in their spelling skills. We're talking pride like a Fourth of July parade. And I never met a single one of them who knew how to make and keep a buck as well as they knew how to spell.
@Account Closed Haha, yes I suppose won't look back on my investing career and count proper spelling among my most valuable learned skills. Hopefully at least.
@Andrew Sampino You lost me way before the expenses or vacancy rates. I would not suggest buying any $360,000 property in the Dallas area that was only bringing in $2675 a month in rent. FULL STOP
He should not be considering the deal for buy and hold residential unless the rents could be raised $500 a month each without any more being spent.
Hey @Andrew Sampino , just wanted to share this one liner with you - seems fitting.
"He convinced against his will, is of the same opinion still."
If you're friend can't see the light, don't waste too much time trying to show him where it's coming from. No sense in wasting time!
@Andrew Sampino - I am not sure why you are worried for your friend, I don't think he needs your advise. He is in the fantasy world with dream merchants. Along with the other advise on the post add the high taxes and bonus foundation issues.
@Andrew Sampino given that plenty has been said against this particular deal, I'll just offer a few general comments.
First, kudos to you for being a concerned friend. I'd hate to see anyone make a big mistake with so much money involved. And to have a friend who cares and is trying to figure out how to help, what a priceless gift on your part.
I have always tried to save a little money for a rainy day. Both in life and with my RE properties. Setting aside some money, even if just a little at a time, not only prepares you for that inevitable rainy day (it ALWAYS comes), but it forces you to learn to live or operate within your means. Too many people and businesses struggle with this, and they eventually pay a heavy price. I don't know what you're friend is wanting to do with all the money that comes in from a RE property, but surely he can set aside some of that cash each month for when life happens.
It sounds like you already know all this, so hopefully there's a nugget or two in there to help you as you work with your friend. Best of luck!
At that price you would be overpaying. Two quick ways to lose money in real estate:
- overpay for a crappy property
- overpay for an excellent property
So... never overpay!
Do you know where this is located and how updated the property is? Just curious regarding the rental rates.
It's your friends money. If he is not willing to listen to the voices of experience then he has more to worry about than a single property purchase. His long term investment strategy might be in jeopardy.
One thing you realize whether 1 years in the business or decades is there is always more to learn. I listen to what others with experience have to say. I might not agree with every single point but usually pick up some good info.
It sounds like your friend might be (frustrated) and just wants to (get going) with something. The herds and fear of losing out is often when bad decisions as an investor are made. One of biggest mistakes is to (talk yourself into buying a property) by manipulating the income and expenses for a rosy pro-forma. What a buyer is left with typically from doing that is they buy a marginal to loss property and have debt they cannot get rid of. When a real deal comes along then they are stuck with the junker of a property.
I have seen some investors buy multiple properties a year and then others maybe 1 a year. 10 years later the buyer purchasing just to buy and grow a portfolio has some that make money, some that break even, and some that lose money. They typically are revenue neutral across the portfolio or losing money with tons of bad debt they could not shed. Meanwhile the conservative buyer who only buys when it meets their target criteria owns 10 properties in a decade and almost all to all are throwing off great cash flow. It also is great to show a lender that you have a track record of success versus a mixed bag of buying properties over time.
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