[Calc Review] Help me analyze this deal

8 Replies

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*This link comes directly from our calculators, based on information input by the member who posted

I have a potential deal on a duplex. On the surface, it seems like an OK deal, not great. I am trying to get some opinions on if it is worth pursuing. This belongs to a friend of mine and he doesn't have it listed. They own it outright with no mortgage. I thought it would be a great potential seller-financed deal, but they weren't interested in that or at least not what I initially put together. So now I am trying to look at it as just an outright purchase even though it isn't discounted in any way.


1. Great condition and is fully rented at $700 per unit (total $1,400 per month)

2. Well maintained. New windows, newer roof, brick exterior, etc. My capital expenditures would probably be minimal for a while.

3. Easy to rent and manage. Current tenants are good, but possibly paying a little bit below market rent.

4. Nice area near a large hospital, which offers great employment and potential future tenants who are employees.

5. If I purchase now I would get a pretty low 30 year fixed mortgage rate.


1. Full price with no discounts from other listed properties.

2. No way to create forced appreciation. I would pretty much be buying a turn-key investment.


*Maybe* I could interest them in taking the down payment (15%) as seller financing in second position and mortgage the balance thus putting me into the property for very little cash outlay, but this is a big IF since they weren't interested in my previous seller-financed offer.

I am trying to figure out if I should just do this and get into the property and start building equity even though it isn't a killer deal or keep looking for something where I can create more of a BRRRR type deal or buy at a discount. The monthly cash flow (using the BP calculator) isn't great, but I also don't need the money so I could just plow it back into the mortgage and keep paying it down. I am not looking for real cash flow for about 13-15 years (retirement).

A few things that I takeaway form the analysis:

- I'm not sure if you've already locked in your mortgage rate.  If not, a 30 year at 4% may be difficult to find and obtain.  A 15 year 4% may be feasible, but if you are looking for 30, I would plan for something between 4.5% - 5.75% depending on the lender.

- Despite having good, established tenants, I would expect vacancy to be higher in the long run.  Many people use 5% while others like to account for one vacant month a year, which puts you in the 8 % - 9% range.

- Even though capex and repairs should remain low for now, this report shows a 30 year projection.  You will likely need to bump those items to at least 7% each, if not higher if you'd like to create an additional buffer.

- Your grown assumptions are probably a little too optimistic.  Expenses at 2% and property value at 3% should be within a percentage point or two of being accurate, but income at 5% will be difficult to pull off unless you have a sizable increase or two at some point, which may be feasible as you mentioned this may be below market rent.  Without a large jump, I think it's going to be very difficult to retain a $700 tenant when there rent will be pushing $900 in five years and $1,150 in 10.  Short of them being promoted or changing careers, they will definitely be moving.

If you take any of these changes into account, I'm guessing the deal will look significantly less attractive.  That being said, I'm not very familiar with the Toledo market so that doesn't necessarily mean it will become a bad deal, though I'd like to think there would be something better than this in your area.

One of the things that Business schools teach is "sensitivity analysis."  The idea is you run a scenario with multiple versions of numbers / assumptions.  You could then see where you would be under best case, worst case, and probably assumptions.

With that said, when I look at what you have, I'd say this deal doesn't look good.

Your monthly cash flow is $84 a month, with some very low numbers.

For instance, your repairs are 3%.  or $1,000 a year.

That's very low for repairs and maintenance.  If your hot water heater goes, or you have any other repair bill, you'll spend that in one go (or more!)  

Keep in mind there are a lot of little costs here.  Salt is $20 a bag in winter.  Landscaping and plowing might end up being $100 + a month.  etc.  Brokerage fees when you need to rerent.  etc.

Capital Expenses are also super low.  5% - 10% is more realistic.   (Remember over a 30 year mortgage you WILL replace your roof, and that could easily be $10k+!)

So, from my point of view, this deal would be a hard pass.  You're getting compensated a negative amount for the life of the deal.  I'd recommend using much more conservative numbers in your calculators.

It's not going to hurt if you end up paying 5% capex over the life of the property, but assumed 10%.  But if you assume 3% and get 5% (which is very good!) you'll be under water!

@Michael Temple My honest feedback is that it looks like you are trying to make the numbers work because you want to just get started in REI and this is the most available, low-pressure opportunity available to you right now. Harsh, but it's a VERY common issue with new investors - you spend all that time learning and reading and listening to podcasts and then it's like 'ok when do I actually DO something'. So I get it, I see it all the time.

But your cashflow is not only low (not always a deal-breaker) but you've got some really low expense figures you're using to get there. Because even though there are tenants NOW, you can't budget 3% vacancy assuming they won't move on next year. If you had been managing this property for 10 years and you had a 3% rate based on historical data, that would be one thing, but you don't. This is doubly true if you're considering raising the rent.

Same for maintenance - you haven't had an appraisal or inspection done, so a 'pretty new roof' is just what it looks like to you, you don't know what's going on with the foundation or under sinks etc. 3% is basically betting you won't even need to fix a toilet in the first year. Especially since it sounds like putting down a lot of cash upfront is an issue for you, I would STRONGLY advise you not to sacrifice the security of having reserves set aside just to 'get moving' on your REI journey.

I also see you have 4% as your rate - are you preapproved at that rate? If so, congrats! If not I would take a closer look at the rate you're likely to get based on the location, your credit score, etc. I know rates are low right now, but depending your specific circumstances you may end up paying more if you have non-excellent credit, if you need to make a lower down payment, if the bank is iffy on the location of the property, etc.

One thing I notice on the plus side is that your tax rate is high. OH taxes are still some of the highest in the US, but just based on Kenwood OH zip of 45236, your average prop tax bill should be about $2300 annually, which works out to about $192 per month or 13.7% of your gross rents: https://smartasset.com/taxes/ohio-property-tax-calculator#rug602DuLl

So that will boost your cashflow a good bit, but then upping your withholding for vacancy and maintenance will likely even it back out.

Basically, this deal seems like more hassle than its worth. I would recommend that you keep saving and looking for something more BRRR if that's your cup of tea. Something you can add value to and force some sweat equity.

Sorry to be the debbie downer lol

@Maureen McCann You are leaning the way I was when I was putting together the analysis minus the expenses comment. I am probably a little rosy on those. I am still trying to learn those. I have 2 other rental properties right now, but I have had them for a long time and I am really familiar with those expenses so trying to learn them for other properties is a bit of a learning experience.

It is true, I did *want* the deal because I thought it would be easy. In my market right now property values are on fire and finding deals where the numbers work is next to impossible, which is frustrating me because I really want to get another property added to my portfolio. As you noted we have very high taxes and our rents are modest by comparison so you have tough numbers to overcome when you put those tax rates in.

I was leaning to the BRRRR idea simply so I could "re-cycle" my starting capital. I have cash to start, but if I start dumping it into properties as down payments I am not going to get too far without having to stop and save more. I thought this deal *might* be worth pursuing if I could get them to take back seller financing on my downpayment and thus having to avoid pulling that out of my current investment stake, but I believe you are correct my expenses are probably forced and I don't have a rate locked in at 4%.

Originally posted by @Michael Temple :

In my market right now property values are on fire and finding deals where the numbers work is next to impossible, 

This is a joke right?  Toledo is on fire?  

Yes, I know tough to believe, but I have chased multiple deals on the MLS and every offer I have made has been rejected and a higher-priced offer has won. The only potential mistake I am making is estimating high on my rehab budget, which is obviously pushing my offer price down. However, as I am learning with this post and others I have made my risk is that I am being too rosy on my projections rather than more conservative. If that is true with the offers I have already made so far I am probably still going too high.

Now that is not to say that there aren't other ways to find deals I am not using, but yes, my experience over the last 2 years chasing deals on the MLS has not been lucrative shall we say. I will add that I am relatively new to REI so experience is a factor in this equation, but I am using BP calculators so I am not totally guessing at numbers.