First Deal, Ann Arbor, Michigan, Deal Analysis

13 Replies

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

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.

hey @Adam Leese . In order to know if the deal is worth it, you have to align it to your goals. What are your goals and does the duplex meet your investing criteria? 

As @Justin Marshall mentioned, I believe you'll have to live in it to take advantage of the FHA loan.

If it’s a deal that fits your goals and criteria, find the money to make it work. Be open to partnerships as they will help you get started. 

@Adam Leese - not sure what part of AA this is in, but unless it's in the heart of campus, I'd sit tight and hold out for a . There are better deals to be had. I saw a 4 plex sell on the west side for the mid $400s. Also, another duplex (further west) just sold for mid $200's.

I think I might go for it, though, if you're planning on living in one of the units. Tough to pass up a house for $350k when you're getting $1400 in rent from the other half, though. What say you, @Sarah Lorenz ?

Originally posted by @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.

 Thanks for the heads up on needing to live in the unit for at least 1 year.  I calculated with rents at $1150(currently in contract) and $1400.  I'd agree that both units would need to be closer to $1400 to be profitable.  I left off rent increase over 30yrs in an effort to calculate worst case.  There shouldn't be 25%capex anywhere, not sure where you saw that.

Thanks for your comments!

Originally posted by @Jay Helms :

hey @Adam Leese . In order to know if the deal is worth it, you have to align it to your goals. What are your goals and does the duplex meet your investing criteria? 

As @Justin Marshall mentioned, I believe you'll have to live in it to take advantage of the FHA loan.

If it’s a deal that fits your goals and criteria, find the money to make it work. Be open to partnerships as they will help you get started. 

@Jay Helms

My goal is to build a portfolio in multifamily units. I wouldn't rule out SFR's, but I feel a duplex would be a good place to start. As far as criteria, being a completely new investor makes that difficult. Is the cap rate decent? Is the ROI worth the effort? I'm reaching out to the community on BP to try to understand some outside perspectives.

Thanks for your comments!

Originally posted by @Joshua Birk :

@Adam Leese - not sure what part of AA this is in, but unless it's in the heart of campus, I'd sit tight and hold out for a . There are better deals to be had. I saw a 4 plex sell on the west side for the mid $400s. Also, another duplex (further west) just sold for mid $200's.

I think I might go for it, though, if you're planning on living in one of the units. Tough to pass up a house for $350k when you're getting $1400 in rent from the other half, though. What say you, @Sarah Lorenz ?

@Joshua Birk 

The duplex is within 1mile of downtown AA.  The current tenant is under contract until Aug @ $1150. 

I appreciate your feedback!

Adam,

I am a fairly new investor as well down in Pensacola (originally from Milford, MI) and I wouldn't touch a deal like that.  As Jay Helms said, it depends on your goals, but I wouldn't go near negative cash flowing deals for a number of reasons. I've had similar frustration with lack of multi-family inventory here, but you can't just rely on real estate agents or the MLS to find deals. I know it's frustrating trying to get deals when the inventory is tight, but pay attention to the numbers and trust your instinct. You don't necessarily have to be patient, but be smart. If you live in Pinckney, maybe try East Lansing. Cheaper and better chance at good cash flow. AA is too overvalued in my opinion. You also have the entire metro area to look into.. there are deals to be had.. Good luck, hit me up if you have questions!

Way to get involved and find a deal to analyze. That’s a good first step.
I have a house in neighboring Ypsilanti, first warning is make sure you aren’t using homestead taxes, I made that mistake originally. Washtenaw county has the highest taxes in the date and I would assume Ann Arbor’s are the worst in that bad category.

You are really cutting that deal close, why are you so set on AA? Maybe look elsewhere in the area, are you looking there for your ease and near your job? Maybe try Ypsilanti and Eastern Michigan or dexter or other communities nearby. @Keri Middaugh is a good contact in ypsi!

Third the already expressed FHA problem, you’ve got to live in it, otherwise you’re committing mortgage fraud.

If you have more questions about the area send me a note!

Hi Adam--There are a couple of things that could make this a good deal. PM me and I'll walk you through it. 

@Adam Leese why are you looking at AA? As others have mentioned it can be viewed as overvalued and has a larger barrier to entry due to the high property values.

I'm also from Pinckney and am looking in Livingston county for MFH.

Let me know if you'd like to get together sometime.

Originally posted by @Craig Herring :

@Adam Leese why are you looking at AA? As others have mentioned it can be viewed as overvalued and has a larger barrier to entry due to the high property values.

I'm also from Pinckney and am looking in Livingston county for MFH.

Let me know if you'd like to get together sometime.

I am interested in MFH's outside of AA.  The AA duplex just came by me and I thought it was worth a deeper look.

Thanks for the mention, @Matt Brechting .  Yep, I do love Ypsilanti. Market values are rising as I write this. 

@Adam Leese , This duplex that you are considering does not meet the 1% rule.  And another duplex that was mentioned in A2, going for $255K, was just (2) 1-bedroom units.  Tough to rent that out for enough money to make a profit as well. MFHs in A2 are tricky because of how expensive they are.  My advice: keep looking.

If you aren't going to live in it the taxes are 935/mo not 700. Welcome to A2!

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