Duplex Analysis - First Rental Property

2 Replies

Hello BP Community, thank you very much for reading. I am hopefully going to be acquiring my first rental unit, a duplex, shortly, presenting offer tomorrow. It's an interesting situation, explanation and analysis below. I would greatly appreciate any feedback and insight from the experienced folks on there, thanks again in advance. 

Acquisition Situation - Tax Lien Foreclosure

-One Tenant Paying Below Lease Value on Informal Agreement with Landlord (more info below)

-This is a duplex in Hunterdon County, NJ.

-The property is owned free & clear, but there is a $54,000 tax lien on the property as the owner hasn't paid taxes in 4 years. He received a notice from the lien holder that they will start foreclosure proceedings soon. I still have time to pay off the lien if he agrees to my terms. If he goes into foreclosure, he'll lose a $350,000 house and walk away with nothing.

-Current tenants in both units on leases through November, however the current owner/landlord has bent to his tenants and is renting well below market value, and I would be inheriting the tenants on their current rates. The current lease also says the tenants have the right to renew the lease for another year with it's current terms and rent rates, locking me in for another year on these rates.

-Unit 1 - 3 bed/2 bath - Rent is $1,800 a month (fair market is $2,200). The lease says $2,200, but the tenant lost his job, and landlord agreed to take $1,800 a month until he gets a new job. So, technically, the tenant is not paying what is on the lease currently.

-Unit 2 - 2 bed/1 bath - Rent is $1,200 a month (fair market is $1,500)

-The ARV is 350,000

-I am stepping into a property well below fair market rent, and need to adjust my offer and terms accordingly.

-In speaking with the seller, I've already set him up to be open to the idea of me paying off the tax lien, paying him a monthly annuity, and eventually cashing him out. 


My offer to the seller (please analyze and offer feedback, offering soon)

-$230,000 for the house

-$60,000 down (paying off lien, avoiding foreclosure, I'll cover closing costs)

-Seller financing for the $170,000 balance at 3.5% ($495.83 payment to him monthly) interest only for 5-7 years (seller's choice)

-If he takes the offer for 5 years, he'll net $259,749 for the house

-If he takes the offer for 7 years, he'll net $271,650 for the house

Overall I think this is a very fair offer and not a bad way for him to get out of this situation considering the alternative.

Property and Cash Flow Analysis based on Current Rents

Offering Price: $230,000

Closing Costs: ~$2,500

Rehab: ~1,000 for some exterior painting

Down Payment: $60,000 to payoff lien, closing costs. The downpayment will be financed by a private lender.

Mortgage Payments: 

-$350 to private lender ($60,000 at 7%)

-$495 to seller (170,000 at 3.5% interest only)


Monthly Costs

Property Taxes: $833

Sewer: $100

Insurance: $120

Lawn Care/Snow Removal: $100

CapEx: $100 (new roof, windows, everything is in good shape)

Vacancy (5%): $150

Repairs (5%): $150

Total: $2,398.17

Monthly Rent: $3,000

Monthly Cashflow: $601.83


I am still unsure of how to approach the tenant who is paying $1,800 instead of the written lease terms of $2,200. According to the lease, I can evict is the tenant does not comply to the terms of the lease. I'd rather not start this off with an eviction. My thinking is it's not a bad cash flow to start considering none of my own capital is invested, and if/when I can raise the units to market value, cash flow will increase.

Again, this is my first buy and hold, I welcome any and all feedback and thoughts. Thank you very much!

Howdy @Rob Stein

I think your cash flow analysis is a little too optimistic. $600 per month total cash flow sounds great. However, your expenses are not what I would consider conservative. How confident are you in the 5% Vacancy? I do not go below 8.34% (one months rent) when analyzing potential deals. Your CapEx amount is extremely low. Have you had the property inspected? If not, how do you know what condition every part of the property is in or how long it should last. Until you know that I would stay conservative and use 10% in my analysis. You did not include Property Management. Even if you plan on self managing it is wise to include PM in your calculations. If you plan to expand your portfolio you may decide you will need a PM at a later date. It may be difficult to add it in at that time. Use 10% for PM.

$250 (8.34%) for Vacancy.  $100 more than your number.

$300 (10%) CapEx. $200 more.

$300 (10%) PM.  

That’s $600 more in expenses than you have.  My point is be sure to make a conservative analysis.  If the actual numbers support your more optimistic analysis then great.  If not it is better to find out now than later.

Regarding the underpaying tenant.  Using my numbers you can see where it will hurt not collecting the full rent.  Your decision.

Originally posted by @John Leavelle :

Howdy @Rob Stein

I think your cash flow analysis is a little too optimistic. $600 per month total cash flow sounds great. However, your expenses are not what I would consider conservative. How confident are you in the 5% Vacancy? I do not go below 8.34% (one months rent) when analyzing potential deals. Your CapEx amount is extremely low. Have you had the property inspected? If not, how do you know what condition every part of the property is in or how long it should last. Until you know that I would stay conservative and use 10% in my analysis. You did not include Property Management. Even if you plan on self managing it is wise to include PM in your calculations. If you plan to expand your portfolio you may decide you will need a PM at a later date. It may be difficult to add it in at that time. Use 10% for PM.

$250 (8.34%) for Vacancy.  $100 more than your number.

$300 (10%) CapEx. $200 more.

$300 (10%) PM.  

That’s $600 more in expenses than you have.  My point is be sure to make a conservative analysis.  If the actual numbers support your more optimistic analysis then great.  If not it is better to find out now than later.

Regarding the underpaying tenant.  Using my numbers you can see where it will hurt not collecting the full rent.  Your decision.

John, thank you so very much for your detailed reply and time you took to read my post. I understand your points, and will raise my expenses accordingly. It's a tough situation for this property, the current owner really backed himself into a corner for whoever would purchase this property from him, walking into a property that's taking in far less rent than it should. The other unit is a 2/1 that was renting for $1,500 (fair market) and the owner lowered to $1,200 for the new tenants, and that rate is locked in for 2 years should they renew the lease. 

John, if you don't mind giving a few more moments of your time, with the increased expenditures, how would you adjust the offer to the owner? Lower offering price? Less interest? Perhaps a contingency that says this offer is contingent upon him getting the tenant to agree to the lease terms, or maybe the owner will start receiving payments once fair market rents are reached? Thanks again John I sincerely appreciate your time!

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