First Deal, Ann Arbor, Michigan, Deal Analysis

[Adam Leese]

First of all, thank you Bigger Pockets team for getting me to the point where I am! I've listened to around 100 of your podcasts.  I'm a new investor looking to get started in multifamily rentals.

I've found an off market duplex for sale in Ann Arbor, MI 48103.  The seller has offered to sell it for $350k.  He purchased it in 1999 for 200k and has had the same two renters for the last 19yrs.  One of the units just opened up and is getting new carpet, kitchen remodel and bathroom remodel.  My original thought was I may be able to "house hack" but I think I'd prefer to rent it out due to the high rent.

Duplex Details:

• Asking Price: 350k
• Front unit under contract until Aug 2018 @ 1150mo.
• Market Rent Rate is $1300-$1400mo
• Built 1977, solid brick construction, 900sq ft and unfinished full basement (x2)
• Garage attached to rear unit  
• New 40yr roof replaced 4yrs ago

Rental Property Calc for Ann Arbor Duplex (link to see property analysis)

I can afford a down payment of 20k so I've ran the deal analysis for a FHA loan: 3.5% down

Closing costs: $7410 ($5910, 1.75% one time Insurance fee + $1500, Inspection and other)

PMI = $243mo (0.85%)

Property Taxes $703mo

I've included minimal expenses for cap-ex and vacancy.

My conclusions: PMI makes this a bad deal for me. The cap rate seems good for the competitive Ann Arbor market. There is only one other duplex in the Ann Arbor area for sale. The front unit is rented under market value which hurts the cash flow of this property. Taxes are very high in Ann Arbor.

The owner has offered a 5yr land contract with 4%interest but I'm unable to afford a $35k down payment. Balloon payment on 60payment. I did run the numbers at 4% for the land contract and the CoC ROI =1.89%, $56mo cashflow, and a Cap Rate = 5.35%. The annualized total return was much higher ~15%. I'm slightly concerned about the interest rate in 5yrs with the cashflow being very minimal at 4%.

Do you think this is a deal worth pursuing?  Do you have any financing ideas that would make this deal worth pursuing?  If you think 350k is too high for the asking price,  what would be a reasonable offer?

Thanks in advance for your time and support.

Regards, 

Adam Leese

[Justin Marshall]

Based on the numbers you presented you would have to live in the property in order to get the fha loan for that interest rate.  Meaning you'd cut your rents in half for at least a year for you to live in the property.  If you are choosing not to live in the property you'd be looking at a 20% down payment and probably 5-8% interest rate pending lenders.  With the larger down payment it would make your cash flow a little better but would it be enough?  My opinion says not for the asking price unless you can get top market rents.  I did notice you bumped the rents to 1275 however you said 1400 is fair market.  Your number also don't reflect any rental rate increases over your 30 year holding time.  I'm confused on the 25% capex especially if you don't have any type of rehab needed.