Duplex w/ Cap Rate of 9.4% as my next move?

Question

Good morning everyone,

I just sold my first house hack last week for a 29k profit, which is about a year's salary for me currently. As I'm about to start medical school next fall, I've got a goal of developing passive income approximately equal to this salary so that I can eat and pay my mortgage on the condo (I plan to house hack again and live with another med student) preferably out of that rather than having to take out more loans that only have one repayment solution. It would also behoove me to develop equity in some assets so that when I'm finished with residency I can sell them (Approximately 7 years from now) and be able to make a large lump-sum payment on my student loans.

Just yesterday, I found out about a duplex for sale with a 9.4% cap rate. They're asking 124k, which means I would be able to pay the 20% down payment. It appears it would cash flow me at approximately 400/mo after PITI, and it's also possibly worth more along the lines of 150k. There is supposedly no deferred maintenance and the tenants have also supposedly kept up with rent recently.

My thought is that I could purchase this and open a HELOC after closing to recapture my capital and keep investing? This would result in the cash flow mentioned above. From here, I could use the HELOC to either purchase another similar property or a laundromat (Is my current thought, but I'm open to new ones).

While this sounds like a great plan, it feels crazy because that's a lot of money for me to put in one place. Am I crazy? What am I missing?

Thanks for reading. I look forward to your all's input.

Elijah Miller · Answer

@Jordan Berry, I messaged you. Thanks for reaching out!

@Aubrey Tatarowicz, thank you for the validation! I felt like it was great, but I didn't know since this is really new to me.

I just looked at it and this one looks great. The hardware has been updated in the last 10 years (HVAC, hot water heater, roof) and it's got good bones and seemingly good tenants installed. The seller's situation seems believable and isn't raising any red flags. I'm excited.

The only downsides are a leak in the basement and the fact that the tenants are awesome. A similar house in a lesser block of the city sold recently for 190k after some simple paint/refinishing of the floors. but I wouldn't want to kick the tenants out when my hope is to buy and hold obviously for the rental income.

My thought is I could buy and refinance the hard money loan in a couple months using my instant equity by the income approach of the house (Valued at 140k by the 1% rule) to keep going. Rental estimates for the area are actually showing it even a bit higher than that though.

UPDATE: It will actually cash flow 675 until I install management and take out the HELOC. I'm pulling the trigger on this. Will update with how it went. Wish me luck guys.

Aubrey Tatarowicz · Answer

@Elijah Miller $200/door is great cashflow, if it works out that way. And the CoC return would also be pretty great too assuming you put 20% down.

I'd double check all the numbers. Did you take into account expenses? BiggerPockets has some calculators and AFAIK, there are some reasonable defaults for the expenses. You'll also want to have reserves in case you have vacancy and need to cover the mortgage. For me, I like to have 4-6 months of mortgage payments in reserves. Another thing to double check are the taxes. A lot of times when a property is bought/sold, the taxes are re-assessed. This may mean your taxes are higher than you're expecting based on current property taxes.

Definitely walk the property to see if there is deferred maintenance.

Duplex w/ Cap Rate of 9.4% as my next move?

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