Duplex Rehab/Rental Analysis -- Is this a good deal?

Question

Hey everyone!

I am a new investor saving for a down payment, and am analyzing deals for practice. I came across what I believe to be a very intriguing deal, and wanted to put it out there for input from the community.

It is a duplex apartment with two 2br/1ba units, totaling roughly 2500 sq/ft. It is listed for sale at $399,000. Average prices for similar buildings on the same street go for anywhere between $400-500k.

My strategy would be to do an FHA loan at 3.5% down, along with an FHA 203k renovation loan in order to improve the property. Some of the things that need work include: renovating the wood flooring, removing the wall paper and repainting the walls and trim, renovating the kitchen and bathroom floors, updating the cabinets and appliances, etc... All relatively accessible improvements.

Additionally, there is an unfinished attic space with plumbing already installed. It would make a fantastic additional bedroom to the upper unit, and would increase the overall bed/bath and square footage of the building.

Lastly, the city plan has indicated that this neighborhood is an area where the city plans to invest money on improving!

What do you think, is this a good deal?

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My initial estimates put the cap rate at around 9%... and similar 2br/1ba apartments in the area rent for around $1500-1750.

The property can be seen on Zillow by following the link below:

https://www.zillow.com/homes/for_sale/fsba,fsbo,fore,new_lt/apartment_duplex_type/2083975172_zpid/0-500000_price/0-1911_mp/globalrelevanceex_sort/43.083462,-89.35695,43.082484,-89.358667_rect/18_zm/

Taylor Horsager · Answer

@Keith Schulz The FHA loan would be owner occupied; I would plan to move in. Thanks for the tips on vacancy!

Keith Schulz · Answer

@Taylor Horsager The property on Morrison St accepted an offer on 6/16. I don't really like the numbers on it, but I do like the location. That area definitely has upside potential. I think it would be more of a play on the potential future value than cashflow. Make sure you have plenty of money in reserves to fund negative cashflow (or neutral at best) if you for something like that.

I live in the Madison area and I agree vacancy is extremely low. However, as others have mentioned, you never want to plan on zero vacancy. I use 4% vacancy in my calculations. I currently have two duplexes (had a couple more at one point), and I've never had a vacancy longer than 5 weeks. ...but unless you are doing college rentals where they move out one day and move in the next, you most certainly will have a little time between tenants. According to the local utility company the actual vacancy rate is just over 3%. A few years ago it was around 2%, but there has been lots of apartment construction in the area.

Also, where are you getting 4.1% on a FHA loan? That seems very low for a non-owner occupied loan.

Keep your eyes open for an upcoming duplex on Willy St if you like that specific area.

@Tim Herman $1750 in rent on Brandie Rd would be a big stretch, and likely a very desperate (not well qualified) renter.

Tim Herman · Answer

@Taylor Horsager So you are going to have one renter move out and another move in the same day. That is 0 vacancy. You do any cleaning or painting you are going to experience vacancy. Your repair budget is fine but your cap ex budget is low. Kitchen cabinet replacement 10 year life span. $5000/10/12= $42 per month times 2= $84. Replace flooring luxury vinyl plank $5sf installed. life span 8 years. 1000 sf =$5000/8/12= $52 x 2 = $104. Two items are already at $188 per month for capex. Looking at duplex:

818-820 Brandie Rd, Madison, WI 53714.

Each 3/2 around 1500sf, if you can get these to rent for $1750 these would reach the 1% as they are asking $329500.

818-820 Brandie Rd, Madison, WI 53714.

Each 3/2 around 1500sf, if you can get these to rent for $1750 these would reach the 1% as they are asking $329500.

Taylor Horsager · Answer

@Thomas Paine I think it really depends on the market... Here in Madison it is probably a lot like Montreal to be honest. Very high demand from an investors perspective, and from the renters as well.

@Tim Herman the reason I didn't include vacancy is because it's (almost) literally 0% in the area. I have a friend that said he competed against 7 other renters to get his apartment lease! Regarding the repairs, I also intentionally kept that figure on the lower side because of the rehab that would take place right away. Is that not a good thought process?

Thomas Paine · Answer

I live in Montreal. Duplex's here cost on average 450k with an average price of 900$ per unit (often less), in normal condition. If we apply a 1% rule, it would mean 1800$/0.01 = 180 000$. There is no duplex with that price. The US must be nice :P

Tim Herman · Answer

@Taylor Horsager You are missing vacancy in your analysis. I use 8% which will make this property cash flow negative. The quickest way to look for deals is the 1% rule. Monthly rent divided by 1%. Projected rent=$3750/.01=$375000 max purchase price. Capex might be a little low. Start to add up major repairs:roof life span 25 years $5000= $17 per month. flooring 8 years for laminate 1000 sf @ $5 sf installed= $52 per month. Someone uploaded an excel file that list the major components and life spans in the tools section that will give you a more accurate number. I use 8% capex and 7% repairs. have you gone to any local meetups to talk to other investors about deals that they have off market. i think there is a better deal out there.

Taylor Horsager · Answer

@Tim Herman -- Setting my cap rate miscalculation aside, do you think this is an attractive deal? The main reason I started this discussion is to validate that I've found a deal worth paying attention to! I know more opportunities will come, but I'd like to know what a good one looks like...

Also, I want to emphasize the fact that the attic would be renovated, and turn one of the units into a 3br/2ba. That unit would then probably rent at around $2000.

Below are the numbers plugged into the BP rental property calculator, where I added $50k to the purchase price to account for renovation costs, since they would be included in the loan.

Taylor Horsager · Answer

Tim Herman · Answer

@Taylor Horsager Using the 50% rule that expenses are half the monthly rent and half to profit and mortgage paydown. @ $1750*12= $21000NOI/$399000 PP= 5.3% cap. Mortgage of $385000@ 4% =$1838 -$1750= $88 per month negative cash flow. you need to provide accurate numbers to analyse the property. Your calculator will be your best friend.

Duplex Rehab/Rental Analysis -- Is this a good deal?

9 Replies

818-820 Brandie Rd, Madison, WI 53714.