Analysis of Duplex in rural area

[Tom Juhn]

I am looking at a duplex in a rural area of Northwest Indiana. The SP is 148,000. The annual rents are 16500.Taxes are 4300. Insurance is $1200. My concern is two fold:

1. Finding tenants in rural areas. Does anyone have properties in these areas and what is your experience in finding tenants?

2. What to start negotiations out at? I was thinking around 125k and not go over somewhere around 132k.

Thanks for the help.

[Nathan Emmert]

Umm, pass.

Lets assume all the info you have is correct and that you've done your due diligence. So you'll buy at $148,000 and put 25% down to get your conventional 5% fixed rate for 30 years loan. You'll put down $37,000 in cash and you'll have a monthly payment of $596.

Per your numbers, your annual rents are $16,500 so you're getting $1,375 a month. Assuming you're familiar with the 50% rule, your monthly NOI would be $690 meaning you cash flow $94 a month after you pay your mortgage.

So $94 a month is $1,128 a year divided by your downpayment of $37,000 is a cash on cash return of 3%.

Here's the real fun part. My property taxes are about 5% of my rents... this property is paying 25%. For you, the 50% rule is probably closer to the 60 or 65% rule meaning you won't cash flow, you'll be negative cash. On a property in a rural area with limited appreciation potential? This is a silly investment unless you're a long term speculator.

Look for properties that have taxes closer to 1 months rent... for purchase prices that generate at least 1.5% of the price in monthly rent. Then you'll be in a better area to invest, at least from a cash flow point of view.