Hi BP community,
If you could take some time, I'd appreciate your feedback on an analysis of my first deal. I'm investing in Iowa and i'm targeting a 10% CoC return with at least $100/unit cashflow.
The property: It's a small duplex. 2b/1ba ground floor unit (currently renting for $600/mth) and a 1b/1ba upstairs (currently renting for ($375/mth). 2 car detached garage. The disclosure indicates that there were termites mitigated in 2013 and that the damage was minimal. I'm not sure what to think about the termite damage, without getting an inspection (which i would do). Within the last 5 years, the water heater has been replaced, a new roof has been installed, radon mitigation system installed, central air AC system installed
- Assume purchase price of 100K, 3K closing costs, 25% down @ 5.25% interest (quote from local bank), $600/yr insurance, 1600/year property taxes, 5% of monthly gross income for vacancy, 7% for repairs, 10% for CapEx
- Below, I've shared my analysis document. Using the current rents, i get a CoC return of 6.99% (booooo) and cashflow of $163.
- But i think the rents may be under market, I also think i can raise the rents if I charge for use of the garage (right now the garage stores the owners stuff). If i can increase rents by $50 each, I'm up to 10.34% CoC return and ~$260 cash flow.
I'm concerned about my analysis being so sensitive to $100/month. Thoughts??? Am i trying too hard to make the numbers work?! Thanks for your time/thoughts!
@Kal A. On the expenses: is there a lawn? have you factored in lawn maintenance and snow removal? What about garbage collection, are you responsible or are the Tenants? Same for utilities (gas, elect., water) do you know who's responsible for what? Is it sub-metered? Have you factored in that taxes will probably go up after your purchase?
On the income: What is the laundry situation? Is there an opportunity to put in coined laundry? Is there unused space that you can charge for or offer storage? Is there an opportunity to add more bedrooms?
All very good points. I haven't added in any lawn or snow removal. That would certainly bring the return down.
The tenants would be responsible for electricity (two meters on the property) but water and gas are not. The current owner somehow had them splitting it 60/40 (the 2bed unit paying 60%) for water and gas. I guess i haven't quite figured out how that works yet.
For laundry, the 2bed unit has a washer and dryer in the basement. This is only accessible through the 2 bed unit. The 1 bed unit doesn't have any laundry provisions. The only unused space that i could charge for would be the garage.
Great points! These inputs will only bring my analysis down further. Thanks for the response!
@Kal A. it might. I don't know how big of a lawn it has but, I'd probably factor $100/mo. year round for lawn and snow removal $1,200/year - you'd have a better idea of what it might be, by calling around.
Great for electricity - for gas and water, you'd probably have to take the monthly bill and divide that by the number of occupants in each unit. For example: Gas bill is $400 total, ..... so Unit 1: 1 occupant and Unit 2: 2 occupants = Unit 1: owes $133.33 and Unit 2: owes $266.67 --- something like that; that would be a bit more fair to the Tenants than just a flat out %, unit 2 may have 4 occupants which would make it not very fair or unit 1 with just one occupant.
If you provide unit 1 with access to the basement somehow, you could put in coined laundry adding a bit of income probably around $20 - $30/mo. don't know if it's worth it if it's to much of hassle to provide access. The garage could get you additional rent if you offered it as an additional option to either tenant for $X.XX / mo. or you could include it in the rent to increase your rentability.
I personally, think the numbers are too tight and your % on return is not much but, I don't know your area - my last advice is that if you still think you want it, is to go in and carve out your numbers on the buying side - if you need $250 in cash-flow every month (after all expenses) then figure out what the sale price needs to be and don't offer more than that. As (If) you get more serious into it, I would then also request to view the current Leases and well as the ones prior, the Tenant background verifications/applications and the any receipts/invoices that the current owner has paid for maintenance/upkeep (such as the new roof) during the inspection period, you could possibly use that in your favor during negotiations. I hope this helps.
@Alex R. I don't know how this comment slipped through my notifications! Thanks for the well thought out advice, I decided to pass on this opportunity. The margins were just too tight. One miss and it was a sinking ship.
@Kal A. , I am going to comment on the termites since you've had some good feedback on the financial analysis. I have personally experienced a termite nightmare, however, they were LIVE. I got a clear termite letter, but the termites were live. After an investigation, the state required the termite company to trench the piers and treat for termites. The state inspector said there are 2 types of homes, those who have had termites (and show prior evidence but have been treated showing no active infestation) and those who will have termites. In other words, you're really not getting around the wood eating creatures unless you maintain an active termite bond/annual treatment from the date it's built. Even then, there are still chances of isolated munching. :)
My case was a bad one. It was an unanticipated expense. I wouldn't have offered the price I did, had I known in advance. Fortunately, I was going to rehab the house anyway. It just caused the work to be more structural than cosmetic. As long as the termites show inactive (which means no tunnels are found) and there are no roof leaks (this is what caused the problem in my house), then you should be fine. If there are any roof leaks, the termites can live at the point of the leak not requiring them to build tunnels to go back into the ground for water. If you find evidence of a roof leak, then I would require a sampling of the area of the leak. They will poke a spike through the wood. If it goes through, you have rot at minimum or termites. That area will need to be fixed anyway, so the drywall will need to be pulled back to see if there are live termites. If there are, then you keep pulling until you find clean wood. There are contractors who specialize in repairing termite damage. They will get rid of the eaten portion and double up with new wood (maybe even treated wood) in that area. We actually decided to switch the bathroom and closet around, so we could get the water out of the previously infested area. We haven't had any other issues since then. We are still repairing structural issues here and there as a result of old damage though (as we're able to get to that area).
I wouldn’t let termites scare you, at least from the disclosure standpoint. Get a home inspection and pest inspection. As long as you don’t have any active pests and whatever damage that was done was repaired correctly (or was minimal) it’ll be fine.
@Margie Fuller Thanks for the input! That sounds like quite a surprise, but you seem to have handled it well. That's honestly a big portion of what keeps me on the sidelines up to this point. Purchasing something that seems like a good deal only to find out there is 20k of unexpected capital expense, up front. I know you can mitigate the risk with a good inspection, but it just seems too real of a possibility. Something i'm working through with mindset.
@Mike McCarthy Do you suggest a pest inspection even if there isn't anything in the disclosure? (for the next deal evaluation)
@Kal A. In general, yes, I'd recommend a home inspection and pest inspection. Most home inspectors aren't licensed to do pest inspections.
That said, if it's a pretty open basement/foundation area, with no visible issues, I might forgo the pest inspection and see what the home inspector finds. But also that's here in the Northeast where we have termites, but not the killer swarms that they have in some places in the South.