[Calc Review] Help me analyze this multi-unit deal (San Diego)

San Diego, CA · Member since 2017 · 20 posts · 1 vote

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Help me analyze this duplex property located in San Diego. The rental income is based on how much it could rent for AS IS. However, one of the units has a lot of sq ft to be able to add another room. In addition, the garage already has dry wall and I think in the future there could be a possibility of converting it into a studio.

Any feedback is greatly appreciated!

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Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

I would allocate a lot more for maintenance/cap ex. If not owner occupied your interest rate seems too low. If not self managed your PM fee is too low. ADU rules do not apply to a duplex so you may not legally be able to convert the garage. The 50% rule shows this as negative over $500/month but at this rent point the 50% rule is very conservative. If we use 45% then negative $325. How much more rent can you get for an extra BR? As projected on the calculator, I would never recommend a buy and hold RE at a cost of $145K for a max of 9% annual return (at year 15). That is below the lifetime S&P 500 return. Are you expecting better market appreciation or rent appreciation than depicted in the calculator? Is the only value adds adding a BR and possibly converting the garage (which I think is unlikely today but given a few years may be a possibility)? Good luck

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Jake S.
Rental Property Investor · MN · Member since 2017 · 864 posts · 555 votes
7y
Jessica, how confident are you with that rent amount?

Management will likely be 8-10%, Insurance will likely be more than $100/mo depending on a few factors. Interest rate, due to being a rental will likely be more around 5% not 4%, I'd budget at least 8% for capex/repairs

After all of this is considered, this will cashflow negatively. I'd walk away
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
7y
I would allocate a lot more for maintenance/cap ex. If not owner occupied your interest rate seems too low. If not self managed your PM fee is too low. ADU rules do not apply to a duplex so you may not legally be able to convert the garage. The 50% rule shows this as negative over $500/month but at this rent point the 50% rule is very conservative. If we use 45% then negative $325. How much more rent can you get for an extra BR? As projected on the calculator, I would never recommend a buy and hold RE at a cost of $145K for a max of 9% annual return (at year 15). That is below the lifetime S&P 500 return. Are you expecting better market appreciation or rent appreciation than depicted in the calculator? Is the only value adds adding a BR and possibly converting the garage (which I think is unlikely today but given a few years may be a possibility)? Good luck
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OP
San Diego, CA · Member since 2017 · 20 posts · 1 vote
7y
@Jake S. Thanks for the feedback!

To answer your question, I am relatively comfortable with that rent amount. I have talked to a few property management companies, checked on rentometer and also few apps that have current rental listings in that area. In addition the smaller unit is already being rented out for ~1750.

I completely agree on the fact that the property management should be higher. I initially put down 5% as I am planning on moving in to one of the rooms and self-managing, but I should think about the costs of having it completely managed by a property management company. I will update that!

Regarding the interest rate, I plan on moving in to one of the rooms for at least a year, I am currently working with a lender who send me the closing costs worksheet which is where I got the 4% from.
Regarding the home insurance, to be honest I got this estimate from my lender, but I have reached out to an insurance company for quotes on this. Hoping to receive those tomorrow so I plan on updating it then.

Thanks for the input on capex/repairs! I will rerun the #s with a higher %.

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Sam Shueh
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
7y
Property management-If some charges that low as stated the service will be terrible. You get what you paid for.
H2O, trash sounds lower.
Insurance-unsure. Since Santa Rosa fire most insurance companies have quantum jumped its premium. It is 30% over previous year.
I will be surprised if you can get 4% interest rate.
Anyway you look at it you need to pitch in each month for awhile.
Check with City on that covered carport legality. I believe it needs to be ankled so as not to flip over hitting someone. A wind, storm can immediately start a lawsuit.
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Joshua J Cawthorn
San Diego · Member since 2019 · 87 posts · 50 votes
7y
Jessica,
I am also shopping for a residential multiplex (2-4 units). I greatly appreciate you posting your numbers here! Would love to see your updated figures as you reel them in. From one shopper to another, I have noticed that the multiplexes here in San Diego proper fly off the MLS after about two weeks (on average). The SFH market is pretty evidently cooling, but the multifamily market seems as robust as ever!
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Twana RasoulBusiness Member
Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
7y
@Joshua J Cawthorn you are absolutely right. For 2-4 units here you have to be on top of it if you want to have any possible shot. What areas you looking in?
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Joshua J Cawthorn
San Diego · Member since 2019 · 87 posts · 50 votes
7y
Anywhere in San Diego proper that could be turned into a deal. Obviously the more south and east we go, the cheaper the neighborhoods become. But renting to C- and D-list tenants comes with it's own risk. So, you know, if you see any multiplexes in north park for $300k, let me know haha!
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Twana RasoulBusiness Member
Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
7y
@Joshua J Cawthorn haha for sure. A “deal” has to be defined in each market and each neighborhood. Once you decide what’s a deal for you, you can easily and rather quickly figure out if it’s possible. Most of the time it is, as long as there are realistic expectations.
Best of luck.
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OP
San Diego, CA · Member since 2017 · 20 posts · 1 vote
7y
@Dan H. Thanks for the feedback!

I increased the maintenance (4%) and capex (8%), I am still relatively new to REI so I wasn't really sure how much to account for there.

I do plan on occupying the property, so the interest rate I plugged in is what I got from the the lender that I am currently working with. However, I would like to add that I was plannin on buying 2 points to lower the interest rate to 4%. I originally lumped it into closing costs, but have separated it in the report now.
I increased the PM fee, I will have to self manage in the beginning since it will be owner occupied. However, I increased the PM fee anyway to account for it as in the future I may not want to self manage.
Regarding how much more rent I can get for an extra BR, I have also did some research on this and if I am being conservative I think I can get around ~300-400 more in rent. I spoke to a couple of property management companies and they mentioned the same.
Given the fact that we are at the top of the market cycle and a recession is looming over us, I don't expect this property to appreciate soon. I am not too sure about rent appreciation, I am still pretty new to real estate investing, so this is not an area that I am too familiar with. I do expect that we would be able to raise rent over the years with the renewal of leases.
Currently I do think the only value adds are adding a BR and converting the garage in the future. There is a small storage shed on the property that is air conditioned, I haven't really looked too into yet but I think this could also be rented out at an extra charge possibly?
Thanks for the feedback!

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OP
San Diego, CA · Member since 2017 · 20 posts · 1 vote
7y
@Sam Shueh
Thanks for the feedback! I have updated the #s to account for higher property management fees.
Regarding the water and trash, it was an estimate but I am currently working on getting actual expenses so I hope to be updating that soon as well.
Regarding the insurance, I have received an update from Farmers Insurance (recommended to me by my lender) and they gave me a quote of an annual premium of 1432.76. The residential property coverages this price includes is dwelling, separate structures, personal property, loss of use, personal liability and medical payments to others. I have gone ahead and updated my #s with that.
About the 4% interest, my lender was able to lock me at this rate but I also am paying 2 points to buy down the interest. I originally lumped it into my closing costs but I have separated that in my report for better visibility.
Thanks for the tip on the covered carport! I will definitely be checking in on that!
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OP
San Diego, CA · Member since 2017 · 20 posts · 1 vote
7y
@Joshua J Cawthorn - I will try to update the link to the report as I continue to make updates! It looks like the original link will show the original report and not the updated one. Also I completely agree, there is a lot of competition for multiunit properties!
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Sam Shueh
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
7y
If you bore holes on the drive way putting posts and cement and add weight the over-sized carport will stabilize. Check with City compliance on height and legality. There was siding paint peeling off on Colfax and trees too close to the house. That just brings up who will take care of yard.
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
7y

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