Obsessed w These New Duplexes - PLEASE, HELP ME ANALYZE!

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Obsessed w These New Duplexes - PLEASE, HELP ME ANALYZE!

Mark S.Pro Member
Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes

Sorry for such a long post, but I'm semi-obsessed with this potential deal. I've been wanting to buy one of these brand new, all-brick duplexes for some time now. I tried to further break it down. All advice and guidance is greatly appreciated. Thanks in advance, everyone!

2 bedroom / 2 bathroom, 1,320 sq ft each (2,640 total), new, all-brick, side-by-side duplexes.

THE NUMBERS - TWO SCENARIOS
SCENARIO 1 - Pay Asking Price, Collect Lowest Rent Likely
Purchase Price: $190,000
Down payment @ 20%: $38,000 down
Loan Amount: $152,000, 30 years at 6.00% (estimating here)
PI: $911.32/month
Gross Monthly Rent: $1,600/month (conservative estimate)
Yes, I realize according to the 50% rule, I'm already cashflow negative.

Expenses
Taxes: $2,119/year = $176.58/month
Insurance: $700/year = $58.33/month
Vacancy: 8.74% (according to www.bestplaces.net, as of June, 2012) = $139.84/month - I think this is a bit high, as these units seem to have very little trouble getting occupied.
Groundskeeping: $500 = $41.66/month
Advertising (Craigslist, Internet, For Rent signs): $100 = $8.33/month
Maintenance/Miscellaneous: $1,000 = $83.33/month

Total Annual Expenses (including vacancy): $6,097.48 = $508.09/month
Net Operating Income: $13,102.52/year = $1,091.87/month
Less Annual Debt Service: -$10,936/year = -$911.32/month
Cashflow Before Taxes: $2,166.52/year = $180.55/month
Yes, below the ideal $100-$200/month per door.
Cap Rate: 6.90%
Cash-on-Cash Return: 5.70%
Taxable Net Income (after adding back $1,816 principal payments and amortizing over 27.5 years for $6,909): -$2,926. So, cash flow is not taxable.

SCENARIO 2 - Pay Slightly Below Ask, Collect More Likely Rent Purchase Price: $185,000 (instead of $190,000).
Down payment @ 20%: $37,000
Loan Amount: $148,000, 30 years at 6.00% (estimating here)
PI: $887.33/month
Gross Monthly Rent: $1,700/month (more realistic estimate)
According to the 50% rule, I'm still slightly in the red here.

Expenses
Taxes: $2,119/year = $176.58/month
Insurance: $700/year = $58.33/month
Vacancy: 8.74% (according to www.bestplaces.net, as of June, 2012) = $148.58/month - I think this is a bit high, as these units seem to have very little trouble getting occupied.
Groundskeeping: $500 = $41.66/month
Advertising (Craigslist, Internet, For Rent signs): $100 = $8.33/month
Maintenance/Miscellaneous: $1,000 = $83.33/month

Total Annual Expenses (including vacancy loss): $6,202.00 = $516.83/month
Net Operating Income: $14,199/year = $1,183.25/month
Less Annual Debt Service: $10,647.96/year = $887.33/month
Cashflow Before Taxes: $3,551.04/year = $295.91month
Cap Rate: 7.67%
Cash-On-Cash Return: 9.60%
Taxable net Income (after adding back $1,768 principal payments and amortizing over 27.5 years at $6,727) = -$1,409. So, cashflow is not taxable.

These numbers are probably far less than impressive, but remember that the property is brand new, my estimates are very conservative, and I'm essentially buying at retail price. I'm willing to sacrifice a little return in exchange for a (at least in the beginning) "lower-maintenance" property. I figure this is a good way to get my feet wet while I gain experience.

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Jean BolgerPro Member
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
13y

"obsessed with" is your first clue... If you are buying a building because you love it, or love the idea of owning it, it should be the place you are going to live. If you are buying a building as an investment, it all comes back to the numbers. I think you may be trying to make these numbers something that they are not.

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  • David J.
    Investor · Houston, TX · Member since 2009 · 210 posts · 261 votes
    13y
    "My estimates are conservative" = famous last words. And I can only assume you mean all your estimates except expenses since your "conservative" expenses are only 30% in your worst case scenario. You better be managing this yourself and getting a great long term rate. You also better not buy very many of these or you will get more than your feet wet if you know what I mean. That said, I know tons of guys that gamble on these spreads but in my opinion (and not worth much) it just isn't worth the headache when you can get a better return with a REIT or MLP. Since you are managing this and you are earning that piece not getting a return on investment. To me this spread is the same as buying a job.
    2Reply
  • Jean BolgerPro Member
    Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
    13y

    "obsessed with" is your first clue... If you are buying a building because you love it, or love the idea of owning it, it should be the place you are going to live. If you are buying a building as an investment, it all comes back to the numbers. I think you may be trying to make these numbers something that they are not.

    5Reply
  • Scott Isley
    Multi-family Investor · Encinitas, CA · Member since 2013 · 38 posts · 10 votes
    13y
    I agree with Jean. One of the major rules of real estate investing is never fall in love with the property. ....but as someone who has yet to cut their teeth on their first deal. My advice is regurgitated from what I've read. (Though it makes sense and I'll be modeling my investment strategy around this principle) That being said, thank you Mark for this post! It's giving us neophytes good experience in analyzing a property by all the pertinent numbers to get a better handle on evaluating investment properties. Curious to know what you decide to do on this one.
    0Reply
  • Michael Smith
    Real Estate Broker · Greenville, SC · Member since 2013 · 269 posts · 141 votes
    13y

    @David J. hit the nail on the head. Your investment decisions should be based on numbers, not emotion. Don't fall in love with a building.

    1Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    13y

    @David J. Yes, I would be managing it myself. I also own REITs, so nothing new there. Not to say that it's "right," but if these really weren't that profitable, then why would a few investors buy and hold several of them adjacent to each other? If they were losing money, would they really keep buying?

    @Jean Bolger I guess I should have been more clear. I'm brand new to real estate and real estate investing. I love the idea of owning a quality piece of property that will likely command quality tenants and above-average rental income for the area. Yes, this may sound like a wish-list, but I know the area and I know what these are renting for. To me, the last thing I want to deal with - especially not being handy AT ALL - are repairs, maintenance issues, or being a slumlord. I feel like this property gives me one of the best opportunities to get involved in this business and still turn a reasonably acceptable profit.

    I guess this is tough love so far, but maybe it's what I need. I just don't see the value in buying a less expensive property that I will probably have to sink money into either now or in the near future. I'd rather pay more upfront, get favorable lending terms, have less immediate maintenance to worry about, and get on with the show. The rents from any other properties in this area certainly won't be any higher.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    13y

    @Scott Isley Thanks! It's definitely a tough one - for me, at least. It took me longer than I care to admit to come up with the numbers. Big kudos to whomever posted the spreadsheet that I downloaded from the site to use in the analysis - REIPropertyAnalyzer.

    @Michael Smith Yes, you're right; I get this. I guess it's more the brand new that I'm in love with versus the actual building. I could find a ****** duplex around here with better numbers, but why, just because the numbers are better (at least for the time being, until I get killed on repairs and deferred maintenance)?

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    Expense and vacancy at 32% with no allowance for capital. New just means you have a solid 20 years to save for a roof, 10 for a water heater, 5 for appliances and 3 for carpets. Doesn't mean you won't have those expenses.

    In part you're generating a return because you're doing the property management yourself and working for free. The properties don't make any money. You do. You're buying a job.

    0Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    13y

    I'm getting my *** kicked so far.... Keep it comin'!

    2Reply
  • Michael Smith
    Real Estate Broker · Greenville, SC · Member since 2013 · 269 posts · 141 votes
    13y

    @Mark S. the first thing you need to figure out is WHY you want to invest in real estate, and what you're long-term goals are. That will help you decide what strategy is best for you. Keep in mind, in real estate you make the money when you BUY a property. If your plan is to pay full retail price for a turnkey property in the high-end side of town, your return on investment will suffer. It's that simple.

    If you're going to take on the risk of using debt to purchase this duplex and take on the responsibility and headache of managing it (marketing, screening tenants, collecting rent, and yes even coordinating repairs and maintenance, and possibly even handling potential disputes and/or evictions), then you have to be compensated properly. As mentioned above, a REIT is a good example of an opportunity cost. If you can average 10% or so by passively investing in a REIT why go through all this trouble to actively manage a far riskier, non-diversified investment only to earn 6%?

    And as stated above, you haven't even considered long-term capital expenditures. New buildings don't stay new forever, and the 50% rule (maybe 42% or so without PM) will catch up with you and leave you with negative cash flow.

    I know this might sound harsh, but it is tough love as you said. So slow down, take a deep breath, look at the numbers and be realistic in your pro formas, network with some local investors and look at all of your options. There's a lot of money to be made in REI, you just have to do it right!

    Good luck!

    2Reply
  • Jean BolgerPro Member
    Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
    13y

    @Mark S.
    well, I don't know your market, obviously, and it may well be that these are a good buy for you- ultimately it's what works for you. You are absolutely right to be thinking about low maintenance buildings, but I don't think you shouldn't have to overpay to get that

    I'd also consider what you said about there being several of these close together. What happens to the desirability of your units if these other landlords hit tough times (or just don't care as much as you do) and start letting these properties slide?
    I am shopping for multis right now, and one thing that I am trying to avoid is areas with a lot of the same duplex/fourplex/whatever all in a row. The reason above is part of it, best scenario for a duplex (IMO) is in an area of mostly SFRs. Also, if all the units in the immediate area are the same, and general vacancy goes up, the main thing you can compete on is price, and if you don't have room to come down you're in trouble.

    just a few more ideas to put in the hopper....

    0Reply
  • David J.
    Investor · Houston, TX · Member since 2009 · 210 posts · 261 votes
    13y
    You are definitely getting your *** kicked but let me say this. This forum is full of hard core duders. I have tons of cash heavy friends that want 100% hands off RE investments and snap up 1%ers like freaking chicklets on a Tijuana street corner. They are completely fine with a 6-9% return because they also think about the appreciation train stops at our station less often than red on a roulette table. A big part of it is that they are just cash heavy and like the idea of RE investing because it is all the hype these days. If they were poor like me they would be looking for increased returns to make every dollar count. Their acceptable return is directly related to the amount of capital they have to deploy. I have less capital so I want to make the most of it. They have more capital so as long as it is all working they are fine with it. It is clear the duplex is not a home run by any stretch of the imagination. My first deal was the worst one I ever bought. At least you will be able to say the same if you buy this one.
    0Reply
  • Scott Seaman
    Rental Property Investor · St Petersburg, FL · Member since 2011 · 79 posts · 24 votes
    13y

    @Mark S. - Your aversion to maintenance headaches and willingness to accept a very low return on your money to avoid having to do any should make you re-evaluate if buy & hold rentals is a good investment strategy for you at all.

    Brand new roofs leak. Tenants flush things they shouldn't and plumbers have to be called. Appliances die 32 days after they're first used (and the aggravation level for me to have to deal with the "warranty" issues is five times what it would be to run down to Lowes/HD and buy a new one to install).

    If you put a deal together with enough spread, the money is there to pay someone to do all that stuff for you if you'd rather not deal with it. That's a property managers job if that's what you want. But buying this using either scenario locks you into a long term mortgage with no money to hire one - that's why everyone keeps saying you are not making an investment, you are buying a job here (and one that pays really poorly from those numbers presented as well) And your job will entail all that you are trying to avoid.

    As for others buying these and how they are making money - the short answer is that they are not. They are parking cash and hoping for some inflation hedge. Maybe they put more money down and it cashflows better for them. Maybe they bought on their CPA's advice because they need it as a tax shelter in some way that makes more financial sense then what you are seeing.

    How much could you buy an older, less nice duplex and have it fixed up to equal your "obsession"? Potentially tens of thousands less, which then gives you both the cashflow as well as postponing maintenance issues. Or what price would a builder charge you to build a new duplex on a cost plus basis? The ones you are looking at are built on spec it sounds like - that means the builder has built in a healthy margin to cover his profit, commissions and carrying costs until he gets it sold - building directly for you could cut that price by 20% possibly.

    Or take a look at lending the money privately to someone who is willing to put up with the job of being a landlord. Your job then is to deposit the checks; leaky roofs and busted toilets are someone else's problem. And if you're willing to loan it out at 6-7% long term, you should find no shortage of takers. Good luck with it either way.

    1Reply
  • Brandon Hicks
    Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
    13y
    Take that $38k and get creative. With that much money I could structure deals for 40-50 units or more!
    0Reply
  • Karen M.
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    13y

    Hey Mark,

    I'm a newbie too, and have not bought a first property yet. We are looking at an out-of-state turn key property with property management for our first one.

    I am also looking at stock investments and it's possible to buy quality stocks with a 5%+ dividend, and your money is not so tied up, you can get out any time.

    I bet there are better deals out there. Take your time to find the best one you can. Good luck!

    0Reply
  • Karen M.
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    13y

    P.S. Don't lose money. ;)

    0Reply
  • Paul Timmins
    Specialist · Rockland, MA · Member since 2010 · 7k+ posts · 2k+ votes
    13y

    @KarenM.

    To find good property managers go to IREM.org search the area for ARM certified <50 units and CPM certified >50 units.

    Paul

    0Reply
  • Account Closed
    Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
    13y
    Don't do it
    0Reply
  • Dev HornPro Member
    Flipper/Rehabber · Arlington, TX · Member since 2013 · 1k+ posts · 2k+ votes
    13y

    There is no "deal" here. You could buy ANY new property and rent it out.

    As mentioned, if you are risk averse, you could consider REITs, buying notes, buying turn-key properties from someone like Memphis Invest, etc. Lots of other strategies.

    Most of us buy distressed properties, so our formulas are never going to make a new property look like a deal.

    0Reply
  • Doss Mann
    Houston, TX · Member since 2013 · 51 posts · 22 votes
    13y

    $38k out of pocket not counting cc with a cash flow of less than $200 a month???

    Search harder, look deeper, make more contacts and market yourself. Find a great deal!

    There is no equity capture to cushion your value. Your paying for the equity and probably more. If cash flow isn't positive over the PI note its no deal for me. You can not escrow taxes and insurance to have more flexibility but you still have to pay the pipers at some point in the year.

    And this might be your only deal since your debt to income might drop to negative. Most lenders credit 75% of rent. I didn't do all the math of your numbers but just glancing at it looks like it will lose money on paper.

    0Reply
  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    13y

    @Karen M. I'm glad to see other rookie real estate investors on here. I'm very well versed in the stock market and have a size able portfolio for my age already. I'm not trying to brag, but to diversify into other types of investing, such as real estate investing (outside of the stock market).

    To everyone else, thank you for your advice. As much as it kills me, I will not move forward with this deal right now. I actually saw two wholesalers from my local REIA post deals online right now for properties they have under contract for SIGNIFICANTLY less. They both need a lot of work, but maybe I've been looking in the wrong places.

    Any poker players out there? Ever been at the table and just get restless after you go card-dead for a while, so you start getting in pots you shouldn't just to get action and then lose your whole stack in a hand you had no business in in the first place? That's kind of how I feel trying to rush into this deal. I learned the hard way to stop doing that at the poker table: discipline. That lesson was probably a whole lot cheaper than a misstep on a ~$200K duplex like this. I'll keep looking and analyzing, and if it's okay, present more numbers on other opportunities.

    1Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    13y

    Well, I'm going to play devil's advocate and suggest this is not that bad a deal - if I have the numbers right. Want to clarify what each unit brings in vs what each side brings in.

    I'm a little unsure about the tax and insurance numbers so I wasn't sure if I was seeing this correctly.

    But basically here is what I understand the deal to be:
    38k down payment

    152k loan - with payments of roughly 900/month.
    Taxes and insurance you have as 2,800 which seem pretty low for a 190k property. But if so, then you're at roughly 250 a month in taxes and insurance.
    Rents are: 1600 (800 a side) but it sounds like you really think that should be 850 a side or 1700.

    1700 minus 1150 a month = 550 a month in gross profit before vacancy/repairs.

    Typically, most people today are getting around 300 to 400 a month right now in gross profit on their deals aren't they. So 275 is pretty close. And the fact that they're brand new has some value. Your maintenance should be much lower.

    Don't worry about your returns when comparing this to stocks. Cash on cash or even cap rate doesn't do the returns justice. You need add in your principal paydown - 2,100 in year 1, 2,700 in year 5 of the loan and so on.

    You need to factor in appreciation. You need to factor in the fact that some of the income you'll be getting is tax free or the fact that on paper you may show a loss that you can use against your income.

    Also, what is a stock going to return in 5 years? Take the stock price and divide by 5 right? But how do you factor in real estate in 5 years? Its not just the income you'll be making today. What will your rents be in 5 years? Your taxes may go up some but nowhere near what I would guess your rents likely would.

    So maybe your cash on cash return isn't that great today. But maybe your overall returns (cash on cash, principal paydown, appreciation, tax benefits) are still a little better than stocks today. But in 5 years, maybe your cash on cash return for this deal is great and your overall return is absolutely fantastic.

    Figure 2% rent increases and 2% appreciation? That seems fair given where the market is these days. If so, what do your numbers look like.

    The only real concern is the lack of equity capture. I know the market has heated up lately but I gotta think there are still deals to be had if you're patient enough. Even if you just grab a 10 or 15% discount. Thats 20 to 30k on a 190k property.

    One other thing. I'm not sure the 20% down is going to get it. I think you may need to do 25% down for investment property unless you have found a really lenient lender.

    Aside from that, I wouldn't rule that out. I don't think new construction works everywhere. But I think in some places (like places where the taxes on a 190k property are only 2k a year), there may be a real opportunity.

    Even if you don't do this, I would definitely recommend that you remember to keep in mind some of the other forms of returns that real estate provides. Principal paydown, appreciation, tax benefits, rent increases.

    There is no way you'd be better off putting that money in the stock market than putting it in these new units. There may be better deals out there in real estate. But there isn't a better return on investment from any other vehicle than you'll find in real estate. Although. to hit the numbers, you do need to put in a little more effort than you do in buying stocks. :-)

    0Reply
  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    13y

    1) You would be living very dangerously with such a deal, unless you have plenty of reserves.

    2) A big part of the problem is using a loan, becoming a slave to the lender - you do all the work and have most all of the liability, they have enough of a down payment that they have little risk. Great deal for them, lousy one for you.

    3) The return is too low. We're in escrow now on two houses - one built in 1969 for $49,000 which will rent for at least $750 (we have another nearby with a Section 8 at $835, so it might even be better). The other for $115,000 is in an excellent location, was built in 1997, and should rent for $1,200. That makes the cost for those two $164,000 (plus closing), with a gross rent total of $1,950. The 1997 house has a 4 year old roof, and the 1969 house was just rehabbed (new bathrooms, new kitchen, etc.), so we do not anticipate any near-term capital needs. We're buying them with cash.

    4) Single family houses are easier to sell than duplexes, as there is a far larger market of buyers, and you can sell one at a time.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    13y

    @Mike H. Yes, you're absolutely correct about the different forms of returns real estate provides. The reason I didn't include these, right or wrong, is all the talk on these forums about appreciation being speculation, etc., and basically to only buy and hold for Cashflow, that the rest is gravy. Your assumptions of the deal that you stated are correct. I actually talked to a local lender that would do 85% LTV, however, it'd be a 5/1 ARM, not fixed.

    @Stephen Masek Buying with cash is great if you have it. I think most of us get financing because we have to.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    13y

    @Mike H. I forgot to address the taxes and insurance. The taxes are what has actually been paid on these from other owners last year, so that's correct. The insurance figure was obtained from an actual quote I got about 8 months ago on one of these actual duplexes. Both figures are accurate. It's Kentucky, bubba! :-)

    0Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    13y

    thanks for the clarification. Just wanted to check thats what I was seeing. Again, the numbers show you'll be making 275 per unit gross profit (before vacancy and repairs). Thats not that bad. You can probably do better if you were to buy a distressed property. But you're likely not going to find a distressed property this new.

    Brand new unit should limit your repairs significantly. And while I agree appreciation is really speculative, principal paydown and tax benefits are not. Principal paydown is absolutely a component that you can factor into your returns. I also think you have to be able to put a line in the sand and make some educated projections on what you think appreciation might be.

    Given what I'm seeing, I don't think I'd have any problem at all factoring in an appreciation factor of 2% a year. Same with rents. And I would almost guarantee that your units are going to rent real easy given that they'll be brand spanking new.

    And I still go back to - even though 275 might be a little tight early on. What will that look like in 2 or 3 years if you are able to raise the rents 25 a month? 350 a month? Or if you can get 875/month per side instead of 850?

    I think people are automatically ruling out new construction just because its new construction. The numbers are not that far off in this case because your taxes are so incredibly low.

    The other value in doing duplexes is that you get two doors with only one loan. That helps preserves the number of conventional spots you'll have available.

    With all that being said, are you sure thats the best gross profit you can do with that much of a down payment? Have you looked at some of the hud homes and factored in that you can typically get those 20 to 30% off their list price?

    I would probably agree that you might be able to do a little better. But I don't think you'll be able to do better from a gross profit standpoint and get a brand new unit that will limit your repairs and make it super easy to rent as much a new construction unit would. There's some real value in that when you talk about ease of management.

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