Revisiting the duplex deal in Dallas, TX

3 Replies

Hi everyone,

I recently posted about a deal that my friend was considering in Dallas, TX; that post is below and labeled "original post". We've looked at the numbers a little more closely and changed up the strategy a bit and would like to know what you all think.

Here's the revised deal:

Purchase Price: $340,000

Down payment: $68,000

Closing Costs: 5% $13,600

Square footage: ~2500

Bed/bath per unit: 3/2 for both

Current rent: $1375 and $1300 but we would raise them both to $1500 each over 2 years

Monthly taxes and insurance: $525

Estimated monthly mortgage payments on $272,000 30 year loan (80% LTV) with a 4% interest rate (which he is confident about): $1300

Estimated monthly maintenance costs: 5% of gross rents ($150)

Capex: 3% of GR ($90)

Vacancy cost: 5% of GR ($150)

Management fee: 2% ($60) (he will manage it himself for 5-7 years when he sells it)

Garbage/heat: $0

lawn care: $100

Misc expenses: $75

Total monthly expenses: $2450

Monthly cash flow before rent raise: $225

Cash on Cash return before rent raise: 3.3%

Cash flow after rent raise: $550

Cash on Cash return after rent raise: 8.1%

We've only alotted 3% for capex because he plans on selling it now in 5-7 years. I got him to account for vacancy, lawn care and maintenance as well. Let me know what you guys think. I know rationalizing away expenses isn't the way to get a good deal but these seem reasonable to us. Let me know if this is a realistic projection or if we're making bad assumptions.

Also thank you to everyone who replied to the original post, there was some very helpful info in there.

Andrew

=============ORIGINAL POST=============

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)

Capex: 0

Vacancy rate: 0%

Garbage/heat/lawn care: 0 (not sure if tenants pay these. Is it realistic to push these off on tenants? 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 tenants pay electric/water. They are long term tenants 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?

A couple comments:

  • Why are closing costs 5%? This seems high?
  • Did you look up actual property taxes for the property? $525/month for taxes and insurance seems a little low at that sales price
  • 4% interest rate on a rental property? Rates I'm seeing on an 80% LTV rental property are closer to 4.875%
Originally posted by @Andrew Sampino :

Hi everyone,

I recently posted about a deal that my friend was considering in Dallas, TX; that post is below and labeled "original post". We've looked at the numbers a little more closely and changed up the strategy a bit and would like to know what you all think.

Here's the revised deal:

Purchase Price: $340,000

Down payment: $68,000

Closing Costs: 5% $13,600

Square footage: ~2500

Bed/bath per unit: 3/2 for both

Current rent: $1375 and $1300 but we would raise them both to $1500 each over 2 years

Monthly taxes and insurance: $525

Estimated monthly mortgage payments on $272,000 30 year loan (80% LTV) with a 4% interest rate (which he is confident about): $1300

Estimated monthly maintenance costs: 5% of gross rents ($150)

Capex: 3% of GR ($90)

Vacancy cost: 5% of GR ($150)

Management fee: 2% ($60) (he will manage it himself for 5-7 years when he sells it)

Garbage/heat: $0

lawn care: $100

Misc expenses: $75

Total monthly expenses: $2450

Monthly cash flow before rent raise: $225

Cash on Cash return before rent raise: 3.3%

Cash flow after rent raise: $550

Cash on Cash return after rent raise: 8.1%

We've only alotted 3% for capex because he plans on selling it now in 5-7 years. I got him to account for vacancy, lawn care and maintenance as well. Let me know what you guys think. I know rationalizing away expenses isn't the way to get a good deal but these seem reasonable to us. Let me know if this is a realistic projection or if we're making bad assumptions.

Also thank you to everyone who replied to the original post, there was some very helpful info in there.

Andrew

=============ORIGINAL POST=============

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)

Capex: 0

Vacancy rate: 0%

Garbage/heat/lawn care: 0 (not sure if tenants pay these. Is it realistic to push these off on tenants? 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 tenants pay electric/water. They are long term tenants 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?

 The interest rate is too low.  I was in around $4.3%, and I believe the rates have gone up quite a bit since then.

@Tyler Hodgson Hm, we didn't realize that it would be different from the loan he has as an owner occupant now. Does that interest rate (the 4.875% you mentioned) come from that fact that is an investment property or that it's not his primary residence or another reason I'm not seeing?

The 5% closing cost came from a quick google search. We read that the costs are between 2% and 5% so we were being conservative.

We got the taxes and insurance from the MLS.

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