$55k Duplex Deal Analysis

21 Replies

Hi all,

The last analysis I posted turned out not to be that hot of a deal. This one seems a lot better. Any help would be appreciated!
Here goes:

Duplex

Purchase Price $55,000
Rents: $1,075 ($550 and $525) Each are 2/1
Property Tax: $925
Insurance: $700
Maintenance, PM, Vacancy: 10% each
Utilities: All payed by Tenants (separately metered)

Financing:
Down Payment: $13,750 (25%)
Loan Amount: $41,250
Closing Costs: $3,000
Cash Outlay: $16,750
Interest Rate/Term: 4% @ 30 Years
Monthly Mortgage: $197

Numbers
Monthly NOI: $646
Monthly Cash Flow: $449

Cash ROI: 32.14%
Cap Rate: 14.09%

Heres some info on the Property:
Pros:
1. Numbers look good!
2. Tenant occupied - One tenant has been there for 3 years. The other, 4 months and is a close friend/relative of the first tenant. PM says they are some of her best tenants. The First tenant is meticulous and is a neat freak.
3. Only duplex on a street of all single family homes.

Cons:
1. 1 Furnace is 18 years old, and the other is 38 years old!
Info: Current owner says they have been working great and have been serviced/tuned last year. He doesn't pay utilities so he isn't concerned about inefficiency. His last buyer walked since because he wouldn't give a concession/fix the 38 year old furnace. He regrets it and is willing to take care of that now.
Dilemma: Lender says max concession is 2% ($1098) I believe the seller increased the price from his previous listing (where buyer backed out) by $2,000 so he can handle a concession. I'm asking the broker for comps that show this thing will appraise for $55k or maybe more (thinking maybe we can just add the cost of the second furnace into the purchase price also?)
How would you handle this situation? How much do basic furnaces run that can heat a 1150sq. ft. 2/1 unit?

2. I got the inspection report from the last buyer and it says the fiberglass shingle roof is 10-15 years old and that the average life is 18-22 years.

That's pretty much it that I can think of. The owner is supposed to send me a copy of the inspection report with all the things that he has fixed/repaired since the inspection from the last buyer (minor/general stuff)

Any more seasoned investors able to share their thoughts on the Furnace issue. How about the roof?

I work graveyard shift and am going to sleep soon. I won't be able to respond right away! I'll definitely check all the posts later tonight.

Thanks in Advance!

Tough Crowd!

Got a quote from from earlier this year for the 2 furnaces from the seller. $3750 for both installed. They are 80% Efficient ones.

I've decided I'm going to make an offer. Will work it out with agent how to approach it. Wish me luck on my first deal!

On the surface @Mehran K. looks like a promising deal. You will build reserves to fix stuff (the capital expenses) if you factor in the 50% rule (you can find the discussion on the BP forum).

As far as deferred maintenance, the seller doesnt get a free pass and cannot dump it on the unsuspecting buyer.

YOU get estimates for heaters and new roof, and take it off the asking price.

Somewhere in the middle, you will reach a deal. Word to the wise, on investment property, you are buying the revenue stream. . .

Dont get seduced by anything else.

Much good luck with this, my brother investor!

Tevis

It appears you're using a PM, so I think your NOI estimate is high by about $110 a month. Same for the cash flow. But still looks like a good deal.

seems like a better deal than my duplex was, and I love mine. If it were me, I'd just factor in the new roof and new furnace right now. You can probably get the furnace for under 3k, if you know the right people (aks local house flippers for referrals.) Same with the roof. IF you plan on these things ahead of time, it won't be a problem when they occur.

Let us know how things go with this!

@Tevis Verrett Thanks for the advice. I'm in the process now of getting my own quote for the furnaces and roof and will use it in my negotiations. I notice you live in Porter Ranch, my parents live there and it is about 15 minutes from me. Nice to see a local colleague.

@Jon Holdman I sure am using a PM. Worth every penny to me! Unless I'm mistaken, the numbers do include the 10% for the PM management fee. But I will double check when I get home.

@Brandon Turner By factoring the costs in now do you mean just consider it an improvement cost on my initial cash outlay? I definitely will listen to your advice on planning/saving for the major things ahead of time. My plan right now is that regardless of what happens I'm saving the 10-15% maintenance costs in the account for the inevitable.

I will for sure keep you posted on how this deal goes. I'm very excited and am already taking note of all the things I've needed to have answered before I felt confident to make an offer. I plan on making some spreadsheets so I can just plug in all the answers when I'm evaluating future properties (PM agreement, status of major home components/maintenance etc) so I can streamline it.

Having this deal analysis section sure helped me organize all the real things I should be paying attention on the deal. Even if it was just to present it to everyone LOL.

Your gross rents are $1075. With the 50% rule (which applies since you're using a PM), the estimated NOI would be $537.50. You're $646. That's where I came up with the $110 a month difference. You've left out a number of items. Capital reserves for one. The potential for a lengthy eviction or serious tenant damage. Utilities, at least when its empty. CPA, Lawyer. Etc.

Looks like a solid deal even if you do have to replace the roof and the heaters in time. Let that rent pile up, what is actually left after paying for real time expenses, and you will be in a good position to replace those systems as they fail.

FWIW, if you can self manage and take care of maintenance, you really save a lot of money. I have a drippy faucet that I am going to repair nest weekend. For me to do it, $30 and time I would have probably spend relaxing (3-4 hours max including drive time and farting around). For a plumber, $150 and for the PM to call the plumber, $50.

@Jon Holdman Thank you very much. When you save $ for these items do you save specific percentages for each? Or do you just apply the 50% rule and save the rough amount in a fund that handles all those as they come up? I Would greatly appreciate any info on how you handle/allocate the collected rent.

Brian Hoyt It's in another state and I rather just have someone else do it. Even if I was local, I'd probably blow up the house before I fixed anything. Handy work is not my forte! The lady that runs the PM company has confirmed with me that she does not charge for calling services over. She believes this is part of her job and it should be covered in her 10% of the rent.

If it's in another state and your're not handy, than my info is moot. But even if calling the maintenance guy is within her 10 percrent, often repairs generated from PM's come with a higher price than if you called the plumber yourself. But again, if it is in another state, you have no choice really. Those of you who invest out of state are a different animal and I just could not do it.

I accumulate funds until I have a nice reserve. I think six months rent is a good number. Probably too much is you have dozens of properties, though. Many months you will have no expenses at all except the taxes and insurance included in the mortgage payments. Then, sometimes, the phone will ring and you've just spent $500. Ever now and then its $5000 instead of $500. If you're going to own properties for the long term, even those brand new furnaces you're putting in will need to be replaced. If you own 20 properties, you're probably buying a new furnace every year. And a new roof. And half a dozen new appliances. Etc.

Brian Hoyt If you lived in los angeles you would either have to move or buy out of state to cash flow lol!

@Jon Holdman I will try that out, 6 months rent x $1075 sounds like a good buffer. I would love the have the drama of buying a new furnace every year! As long as it came with those 20 properties.

Quick question:

Owner increased the sales price by $4k after last deal fell through over the furnaces. I'm assuming this is to cover the furnaces either by concession or fixing it himself. Problem is with financing I'm limited to 2% concession ($1100)

How would you got about structuring the offer?
Offer $51k, take the $1100 concession, and fix the furnaces with cash. (My thoughts are I could then write this off as my own expense)

Or offer the $55k and make sure the furnaces are replaced before I close [I don't know if this is to be done after the inspection as a condition, or just have my broker tell them that's how I want it before we offer]
My thoughts on this would be less cash outlay for me, I'm paying interest on that 4k over the years

Or is there another more creative way to handle it that I just am not aware of yet?

Updated about 6 years ago

Ok, I went with offering thelist price of $55k, asked for the 2% concession, and that the furnaces be replaced prior to closing. Agent said he can either replace them with his cash on hand if he has it, or have the contractor do it close to closing an

I had a similar deal as a seller. Buyer's wanted a new sewer line (common around here for certain vintages of houses, another thing you can add to your list of long term, expensive repairs). We agreed to split the $5000 cost. So, we increased the selling price by $2500 and then we paid for the sewer line at closing. The contractor did the work before closing and agreed to be paid out of the money at closing. So the bill for the sewer appeared on the HUD-1 and the title company sent the contractor a check. This shouldn't be considered a concession on by the lender. Rather, its an expense the seller is paying out of their proceeds. If the seller raised their price to cover this, it should be something they're already expecting to have to pay.

Oh, as far as writeoffs, it doesn't matter if you pay $55K, or if you pay $51K and then spend $4,000 after closing. The $4,000 still adds onto the basis and has to be depreciated. You can't take the $4,000 as an expense this year, even if you replace the furnaces after closing.

Awesome, thanks Jon. My broker suggested the same thing but didn't go into the exact details of how it goes on the HUD-1. I feel better about my offer now.

And thanks also for clearing up the tax aspect of it. Is the reason I can't count the $4k as an expense this year because furnace replacements are considered an improvement instead of a repair?

Ok so I signed the closing docs today. It won't fund til tomorrow but I may as well update while I'm excited haha.
@Brandon Turner

So Final Numbers on Duplex:
Sales Price: $54,900
Seller Concession 2%: $1,098
Final PITI: $355/mo
Insurance from NREIA: $59.07/mo (Special Replacement Coverage, $1m/2m liability)
Seller Replaced both furnaces with brand new 80% Efficiency Rheem Furnaces (Cost him $3,000)
Inspection revealed some mold in the basement due to a leaking pipe which was remediated and the pipe was fixed. A few other things were fixed.
After the concession, prorated rents for April and security deposits(which I'm setting up a separate account for):
I only had to bring $13k and change to closing.

Property Management
I feel really good about the lady who runs the PM Company in place. All the questions I compiled to interview her with she answered all the way I was hoping. She's quick to respond and is pretty tech savvy (emails/texts etc).

The agent that helped me buy the property helps a lot of investors sell properties in the area and is aware to let me know of any that are open to seller financing.

I Will be setting aside $ for the new roof in around 5 years or so. But knowing me, I'll likely end up using it for another acquisition (I'll try to be disciplined though!)

It feels good to acquire my first real asset (primary residence is a liability!) I've created kind of a flowchart/folder of files with all the steps I took, from researching the property all the way to closing So I can streamline this. This game is exciting! Thanks BP!

Now it's on to #2. Expect a deal analysis post real soon :)

Congrats! can't wait to hear about the next one!

THIS IS AWESOME @Mehran K. ! Congrats, and be sure to let us know if you have any questions going forward! I'm super stoked for you!!

@Mehran K. I am really excited for you. Congratulations.

Congrats Mehran. I like that you interviewed/hired your PM simultaneously with taking ownership. This will likely be an easier transition than bringing them on board down the road.

Good luck with your new real asset!

Thanks Everyone!

@Brandon Turner I definitely will!

@Brandon Eleazer I wouldn't even have considered making an offer without being confident in having a PM and backup in place. In fact, I interviewed and got to know her before I made the offer. She was the one who coordinated all the inspections/repairs. We spent a while chatting about our views on how property should be run/maintained. She seems real awesome. Turns out she used to oversee Rehabs for an out of state investor. cha-ching!

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