Off-market duplex in Tacoma, WA - help me analyze

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Off-market duplex in Tacoma, WA - help me analyze

Pete M.
Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes

Hi all,

Connected with a MFR broker (investor himself, too) who brought to my attention an off-market deal for a duplex in Tacoma, WA. This is in the South Tacoma area, 98418 zip. I'm leaving in about 30 mins to go see the property. This home was last purchased in 2012 on a VA loan, and the owner(s) were transferred the following year (property tax site says they currently reside in VA). This broker says the property will appraise for $330,000 minimum. Bit more directly from the broker:

"This home was purchased with a VA Loan in 2012 and the owner got relocated a year later. Due to the strict lending requirements of VA loans, the home is complete updated and has new Romex electrical and electrical panel, new copper plumbing for hot and cold water line, new black abs drain lines, new main drain line, new sewer line, new composition roof, an I-beam reinforced deck, and more. Cosmetically, there is very little to do. I recommend an interior and exterior paint within the next year."

Ask price: $290,000

Unit: 3/1 (1850 sq ft) & 1/1 (1050 sq ft)

Built: 1925 (shows Adj. build date of 1961)

Current gross rent: $2750/mo

Below chart provided by broker:

2 Units
Appreciation 3% 3% 3% 3% 3% 3% 3%
Price/Sqft   $ 99.32              
Value Estimate   290,000 298,700 307,661 316,891 326,398 336,189 346,275 356,663
Asking Price   290,000              
Purchase Price   290,000
Price Per Unit   145,000.00
Misc Expenses   -
Total Sqft   2,920
Rentable   2,920
  -
Total Cost   290,000
Downpayment 25% 72,500              
Loan   $217,500
Rate   4.750%              
Payment Term   30  
Monthly Principal and Interest     1,135 1,135 1,135 1,135 1,135 1,135 1,135
Utilities (Wtr, Swr, Grb) 100% Paid by Tenants   - - - - - - -
Maintanenc e Expenses     138 83 85 88 90 93 96
Taxes     279 288 296 305 314 324 334
Insurance     55 57 58 60 62 64 66
Vacancy Rate @5%     138 142 146 150 155 159 164
Property Management Fee   10% 275 283.25 291.75 300.50 309.51 318.80 328.36
Monthly Cash Out 2,019 1,986 2,012 2,038 2,065 2,093 2,122
               
Monthly Rent $ 2,750.00 2,750 2,833 2,917 3,005 3,095 3,188 3,284
             
Monthly Cashflow 731 846 906 967 1,030 1,095 1,162
               
Annual Cashflow*     8,773 10,154 10,867 11,602 12,358 13,137 13,940
Mortgage Principal Paid     3,284 3,284 3,284 3,284 3,284 3,284 3,284
Annual Appreciation (Estimated) 8,700 8,961 9,230 9,507 9,792 10,086 10,388
Total Annual Return     20,757 22,399 23,381 24,392 25,434 26,507 27,612
               
Cap Rate     8.05%          
             
ROI Cash On Cash     12.10%          
               
ROI Cash/Debt Reduction/Appreciation   28.63%            

Seems like he's assuming 5% for maintenance, about $3348 for taxes (which is in-line with county tax site), can't speak definitely to insurance rate, but seems reasonable, 5% vacancy, and 10% for PM. To me, seems like he's missing an expense for CapEx.

My outstanding questions for broker:

-Condition/age of HVAC & water heater

-Does that $290k include closing costs (not separately itemized on his sheet)

-Who is currently paying for electric bill? (Believe water/sewage/garbage are paid by tenants, but unclear on electric)

-I don't see any item listed for CapEx... seems like a big miss to me in his cash flow / CoC calculations

-Does it require flood insurance?

-He mentioned he got this lead from a wholesaler, and he tacks on 3%; is that already factored in to the $290k price?

-Why remove vacancy cost from Cap Rate calculation?

What other questions should I be asking? What do you all think of these numbers? My napkin math of CoC came out lower than his 12%; if I set aside about $200/mo for CapEx, that lowers the annualized cash flow from $8773 down to $6373, which puts the CoC at 8.7%. Could be even lower if we have to put some more money in for repairs, paint, etc.

Is Cap Rate even a relevant metric on this kind of property?  I've heard typically not since these small MFRs are valued based on comps.

Thanks.

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Ike Hobbs
Investor · Wichita, KS · Member since 2016 · 133 posts · 63 votes
8y

A couple thoughts. 

Seems kinda thin to me. Rents are high especially if it's in the condition that you described. I don't like it when people estimate a raise in rents in proving that a property is a good deal. Also is that a city approved duplex? That will matter a lot on your loan obviously. 

Sound's like they've done a lot of work to it though and that would make your maintenance pretty low as well as your stress level for your first deal. 

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  • Andrew Kerr
    Rental Property Investor · Everywhere, USA · Member since 2012 · 689 posts · 525 votes
    8y

    @Pete M. - The thing that jumped out on it to me, which you caught was the lack of reserves/capex. Depending on the age and how quickly major systems will need to be renovated, you might want to budget 8-10%. Maintenance might also be a little low.

    You got all the right questions to ask.

    Also, I know nothing of this zip-code or broader MSA, so the following comment is just numbers driven, but it looks like an interesting deal and one I might make an offer on. 

    How did the walk thru go?

    0Reply
  • Pete M.
    OP
    Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
    8y

    @Andrew Kerr

    The major systems in the house are relatively new, it seems. Sounds like the roof, HVAC, and water heater are all ~5 years old, so I'd hope the maintenance costs on those systems would be minimal if at all. Either way I'd budget some CapEx money away for the unforeseen, probably $150-$200/mo.

    As to the offer, my understanding is it's $290k firm (which I found out does include all closing costs and the broker's 3% fee).

    The inside is definitely a converted house.  The main floor has hardwood floors (obvious signs of wear & tear, but not so bad that I'd refinish them) and some areas are carpeted (definitely need to be cleaned).  They have 2-3 dogs plus some cats in there now, so there's an obvious pet smell, though not as bad as I would expect with that many pets.  The main unit (3bd/1ba) has the "master" in the finished attic, and walks out onto deck on the backside.  Some deferred yard maintenance, mostly some shrubs/bushes that need to either come out or be trimmed back (there's a large pine slowly swallowing a playset in the backyard).  Main unit is ~1750 sq ft, which is a good size for a 3-bed.  Good character in the main unit.

    The downstairs unit (currently 1bd/1ba) has tile and carpet flooring, and is about 1050 sq ft--very large for a 1-bed unit, IMO.  Not sure if it could be converted to a 2-bed or not; there's a window in the living space now for egress, but would have to check the local code requirements.  They also did a cutout in the wall to open that space up a bit, so it'd be awkward for a bedroom.  I wasn't thrilled with the layout of the downstairs unit, but it's functional.

    All-in-all, I'd likely add $10k to the initial outlay to cover painting the entire interior & exterior (exterior hasn't seen a new coat in a while), and to do some cleaning of the interior.  Grout needs to be cleaned up in the downstairs unit, for example, and there are some missing outlet covers.

    My biggest concerns would be whether tenants would actually pay the premium for the extra sq ft of the units, whether it will truly appraise for a minimum of $330k after a 6mo seasoning period, and if this is really a good deal or the wholesaler/broker aren't leaving enough meat on the bone...

    Thanks. 

    0Reply
  • Jay Helms
    Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
    8y

    @Pete M. - you're on the right track here. Based on these #s I'd submit an offer, but do they fit your criteria and will acquiring this property help you achiever your REI goals?

    BTW, yes cap rate on a small MFR is typically disregarded.

    0Reply
  • Pete M.
    OP
    Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
    8y

    @Jay Helms Thanks for the info.  My goal with a first property is to achieve some cash flow while getting my feet wet.  While I certainly want positive cash flow (and hopefully appreciation) on the unit, one of the biggest values to me is the firsthand experience I'll gain in figuring out how to acquire good investments and successfully transition them into a portfolio that requires minimal input from me.  From there, I hope to start scaling into apartment units with a positive track record, a working system, and a network of people to make it happen.

    Thanks.

    0Reply
  • Jay Helms
    Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
    8y

    solid goals @Pete M..  Let me know how I can help you. 

    0Reply
  • Bettina F.
    Investor · Post Falls, ID · Member since 2016 · 606 posts · 699 votes
    8y
    I left Tacoma in 2013. I would not buy a house built in 1925 in south Tacoma. If you live in Issaquah, you are 1/3 of the way to Spokane. You could get a nice 4 plex circa 1980 s in Spokane for $330K
    0Reply
  • Pete M.
    OP
    Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
    8y

    @Bettina F. Thanks for the feedback, Bettina.  Any reasons in particular you left that market and would recommend avoiding that kind of property?  Just hoping to understand the reasoning.  

    This property shows an adjusted build date of 1961 (still not new by any means), and the major systems have been updated (to my knowledge)--new Romex wiring, copper plumbing, and HVAC/roof/water heater all ~5 yrs old.

    Thanks!

    0Reply
  • Pete M.
    OP
    Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
    8y

    Oh, and Spokane is definitely a place I'll be looking at as well.  In either case I'll be using a Property Management company to handle the issues.

    0Reply
  • Ike Hobbs
    Investor · Wichita, KS · Member since 2016 · 133 posts · 63 votes
    8y

    A couple thoughts. 

    Seems kinda thin to me. Rents are high especially if it's in the condition that you described. I don't like it when people estimate a raise in rents in proving that a property is a good deal. Also is that a city approved duplex? That will matter a lot on your loan obviously. 

    Sound's like they've done a lot of work to it though and that would make your maintenance pretty low as well as your stress level for your first deal. 

    1Reply
  • Account Closed
    Rental Property Investor · Everett, WA · Member since 2013 · 389 posts · 222 votes
    8y

    @Pete M. if you can truly achieve those rents, it is a LEGAL duplex and has all those systems updated that is a decent deal for the area. Near 1% rule. I doubt you could find much better and I think it would be perfect to get your "feet wet".

    One other thing I'd be looking for is updated double pane windows.

    Also, 5% for repairs is low for 1925 build (even if updated in '61). I have lots of early 1900's built places and unless it has been torn to the studs after the 80's, lots of the plumbing and wiring behind the walls can be wonky and costs $$$ at times to repair.

    1Reply
  • Bettina F.
    Investor · Post Falls, ID · Member since 2016 · 606 posts · 699 votes
    8y
    Originally posted by @Pete M.:

    @Bettina F. Thanks for the feedback, Bettina.  Any reasons in particular you left that market and would recommend avoiding that kind of property?  Just hoping to understand the reasoning.  

    I lived in Tacoma from 1981 to 2013.  A few years before I left, the city decided to clean up the Hilltop with extra police patrols, etc.  The miscreants moved to South Tacoma.  Lots of gang activity in that part of town.  The better neighborhoods are Ruston (cute, hippy vibe), Proctor, North Tacoma, Stadium District (pricey), Fircrest, NE Tacoma, University Place, Old Town (also pricey), near Point Defiance, Allenmore (choose wisely).    Surrounding towns that are good are Puyallup, Fife, Sumner, Milton.  Federal Way is starting to get lots of gang activity.  Anything with a water view is going to be $$$$, but there are plenty of modest houses a block away from the view properties.  

    I just can't see a nearly 100 year old house in a bad part of town as being a good investment.  Maybe the area has improved since I left.

    We left Tacoma in 2013 due to high property taxes and liberal politics.   The kids were grown, we did not need the space, and our house had tripled in value.  Took our profits and moved to Idaho.  Traded the house overlooking Commencement Bay for a hobby farm and an apartment building.

    0Reply
  • Seth Borman
    Rental Property Investor · Phoenix, AZ · Member since 2016 · 553 posts · 314 votes
    8y

    Bettina, houses in South Tacoma have been appreciating at an incredible rate. My cousin bought one for $100,000 and it's now worth $200,000 with a little work. Lots of young professionals getting their first house in South Tacoma.

    0Reply
  • Pete M.
    OP
    Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
    8y

    @Bettina F. Thanks for the candid feedback.  This home is a little east of the Tacoma Mall, for area reference--kinda tucked into the area where I-5 does a 90-degree bend.  I'd call it a C/C+ neighborhood.  That block seemed in decent shape, though, and I didn't see any overt signs that would have made me sweat about leaving my vehicle parked out front.  I checked out the crime stats on Trulia, and it seems to vary quite a bit by block.  That block is shown as green (safer side of things), but it does vary around it.  The public school systems serving that house aren't the greatest.  Also did a search on familywatchdog.us and found three people with "offenses against children" living within a two block walk... little concerning.

    @Account Closed Any recommendations on percentage to set aside for maintenace and CapEx? I modified the document from the broker by bumping maintenance up to 6% of gross rent and added CapEx at 7%. That still leaves a little over $500 in monthly cash flow (again, assuming the $2750 gross rent for both units is accurate).

    How would I go about verifying whether the house is legally a duplex?

    Thanks all for the input!

    0Reply
  • Account Closed
    Rental Property Investor · Everett, WA · Member since 2013 · 389 posts · 222 votes
    8y

    @Pete M. we operate 12-15% capex and repairs so you are within our range. Go to the city and check permit records for legality 

    1Reply
  • Pete M.
    OP
    Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
    8y

    @Account Closed I'm showing about $500 in monthly cash flow if the target gross rent ($2750) is met.  This is my biggest fear, however--not hitting those would quickly shrink the cash flow.

    Thanks.

    Pete

    0Reply
  • Account Closed
    Rental Property Investor · Everett, WA · Member since 2013 · 389 posts · 222 votes
    8y

    @Pete M. I hate to burst your bubble but if it is listed as SFR I can almost guarantee it is not a legal duplex. But I'm not a lawyer so don't take my word for it. Plus, plenty of people make tons of money off illegal units. Talk to your lender. They may only use rent from one unit since other unit isn't legal

    0Reply
  • Ike Hobbs
    Investor · Wichita, KS · Member since 2016 · 133 posts · 63 votes
    8y

    Well make sure you have proof that's what they're actually getting for the rents. As you've noted Tacoma can be spotty block to block on neighborhood conditions but really think that rent is pushing the limits of the current market. 

    On the loan question...talk to @Albert Bui

    0Reply
  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    8y
    Originally posted by @Pete M.:

    Hi all,

    Connected with a MFR broker (investor himself, too) who brought to my attention an off-market deal for a duplex in Tacoma, WA. This is in the South Tacoma area, 98418 zip. I'm leaving in about 30 mins to go see the property. This home was last purchased in 2012 on a VA loan, and the owner(s) were transferred the following year (property tax site says they currently reside in VA). This broker says the property will appraise for $330,000 minimum. Bit more directly from the broker:

    "This home was purchased with a VA Loan in 2012 and the owner got relocated a year later. Due to the strict lending requirements of VA loans, the home is complete updated and has new Romex electrical and electrical panel, new copper plumbing for hot and cold water line, new black abs drain lines, new main drain line, new sewer line, new composition roof, an I-beam reinforced deck, and more. Cosmetically, there is very little to do. I recommend an interior and exterior paint within the next year."

    Ask price: $290,000

    Unit: 3/1 (1850 sq ft) & 1/1 (1050 sq ft)

    Built: 1925 (shows Adj. build date of 1961)

    Current gross rent: $2750/mo

    Below chart provided by broker:

    2 Units
    Appreciation 3% 3% 3% 3% 3% 3% 3%
    Price/Sqft   $ 99.32              
    Value Estimate   290,000 298,700 307,661 316,891 326,398 336,189 346,275 356,663
    Asking Price   290,000              
    Purchase Price   290,000
    Price Per Unit   145,000.00
    Misc Expenses   -
    Total Sqft   2,920
    Rentable   2,920
      -
    Total Cost   290,000
    Downpayment 25% 72,500              
    Loan   $217,500
    Rate   4.750%              
    Payment Term   30  
    Monthly Principal and Interest     1,135 1,135 1,135 1,135 1,135 1,135 1,135
    Utilities (Wtr, Swr, Grb) 100% Paid by Tenants   - - - - - - -
    Maintanenc e Expenses     138 83 85 88 90 93 96
    Taxes     279 288 296 305 314 324 334
    Insurance     55 57 58 60 62 64 66
    Vacancy Rate @5%     138 142 146 150 155 159 164
    Property Management Fee   10% 275 283.25 291.75 300.50 309.51 318.80 328.36
    Monthly Cash Out 2,019 1,986 2,012 2,038 2,065 2,093 2,122
                   
    Monthly Rent $ 2,750.00 2,750 2,833 2,917 3,005 3,095 3,188 3,284
                 
    Monthly Cashflow 731 846 906 967 1,030 1,095 1,162
                   
    Annual Cashflow*     8,773 10,154 10,867 11,602 12,358 13,137 13,940
    Mortgage Principal Paid     3,284 3,284 3,284 3,284 3,284 3,284 3,284
    Annual Appreciation (Estimated) 8,700 8,961 9,230 9,507 9,792 10,086 10,388
    Total Annual Return     20,757 22,399 23,381 24,392 25,434 26,507 27,612
                   
    Cap Rate     8.05%          
                 
    ROI Cash On Cash     12.10%          
                   
    ROI Cash/Debt Reduction/Appreciation   28.63%            

    Seems like he's assuming 5% for maintenance, about $3348 for taxes (which is in-line with county tax site), can't speak definitely to insurance rate, but seems reasonable, 5% vacancy, and 10% for PM. To me, seems like he's missing an expense for CapEx.

    My outstanding questions for broker:

    -Condition/age of HVAC & water heater

    -Does that $290k include closing costs (not separately itemized on his sheet)

    -Who is currently paying for electric bill? (Believe water/sewage/garbage are paid by tenants, but unclear on electric)

    -I don't see any item listed for CapEx... seems like a big miss to me in his cash flow / CoC calculations

    -Does it require flood insurance?

    -He mentioned he got this lead from a wholesaler, and he tacks on 3%; is that already factored in to the $290k price?

    -Why remove vacancy cost from Cap Rate calculation?

    What other questions should I be asking? What do you all think of these numbers? My napkin math of CoC came out lower than his 12%; if I set aside about $200/mo for CapEx, that lowers the annualized cash flow from $8773 down to $6373, which puts the CoC at 8.7%. Could be even lower if we have to put some more money in for repairs, paint, etc.

    Is Cap Rate even a relevant metric on this kind of property?  I've heard typically not since these small MFRs are valued based on comps.

    Thanks.

    Do you need Flood ? if youre property pops up on the government FEMA flood zone then yes, if not, then no.

    Your other questions are all investor centric questions.

    - electric paid by who? see if its individually metered you can go around the back or side of the property and look at your service meters 

    - the rest of the questions are for the broker or wholesale to clarify your deal

    - vacancy question and cap rate, is it even relevant? the value will be determined by comparable analysis anyway since its 1-4 unit property. The cap rate could be for your own criteria and or analysis

    - 98418 my opinion is where I go to get my good chinese noodles and bbq pork its bombtastic. As soon as I am done I vacate the area. Its like international district in Seattle you go there to get your milk tea and some noodles or food and you jet out =0.

    0Reply
  • Pete M.
    OP
    Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
    8y

    @Albert Bui Thanks for the feedback.

    As far as I can tell, no flood insurance is needed.  Broker says the same, and nothing noted about flood insurance from the two lenders I've had work up numbers.

    Electric is paid by tenants, I know that. It's not sub-metered, and I'd likely just write it into the contract to split it by heads in each unit.

    Definitely a C neighborhood, but it really varied by the block.  This block didn't feel bad to me.

    0Reply
  • Pete M.
    OP
    Financial Advisor · Issaquah, WA · Member since 2017 · 241 posts · 141 votes
    8y

    I wanted to post a follow-up on this thread.  I decided to pass on this property today for a variety of reasons, which I'll spell out here. Feel free to analyze and comment on whether it makes sense or not.

    1. After finding a new financial advisor, I've decided to restructure a lot of my holdings to set myself up better for real estate investing, life insurance, etc. This includes using a whole life insurance policy that we can get a LOC against for buying homes at a decent rate. Figured it would be best to do this before starting to tie up properties.

    2. The permitting issues on the house are still unclear to me and I don't want to step into something like that on my first property. I'd rather pass on a good deal than buy a lemon starting out.

    3. I'm not sure if this property aligns with my goals of focusing on cash flow vs appreciation. My conservative numbers showed a positive cash flow, but the age of the unit (even with major upgrades) still has me wondering and one big ticket item could wipe out the cash flow easily.

    4. Seems to violate the rule of "buy a C home in a B neighborhood." This one seems to be the reverse, in my opinion.

    5. Not confident we could get those rental prices, as noted. I talked to a PM who works in that area, and he suggested dropping the $2750 down to around $2500-$2550 (gross on both) to attract better tenants.

    Thanks all for the feedback!

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