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 · 539 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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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    13y

    @Mike H. Yes, thank you! I just want to get in the game. This may sound dumb, but if my profits are slightly less, but the expected maintenance and extremely low vacancy risk are handled, I'm okay with not hitting a grand slam on my first deal. It gets me experience; it gets me in the game. Some basically said, or implied, that this purchase may very well get me out of the game, but you seem to feel differently and that's encouraging.

    I'll continue to look, but I guess I'm going to have to think long and hard about this one.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    13y

    Okay, everyone, so I have some updates to what I originally posted. I spoke directly with one of the local builders in town (he's been around for about 30 years and actually built my primary residence in 2012) regarding this. He told me that he can get one of the lots where these are and build me a duplex, without a realtor involved, for about $170,000. Everything else should remain the same. @Mike H. , I think this might just be the 10% or $20,000 off the sales price you mentioned in your post.

    With the new sales price of $170,000, I re-ran the numbers. Here's what I got:

    SCENARIO 1: RENTS ARE $1,600/MONTH ($800/UNIT)

    Purchase Price: $170,000
    Down Payment @ 20%: $34,000
    Loan Amount: $136,000 @ 6% (estimated interest rate...in process of talking to bank)
    PI: $815/month
    Gross Monthly Rents: $1,600 (@ $800/unit)

    Expenses (rounded)
    Taxes: $2,119/year = $176/month
    Insurance: $700/year = $58/month
    Vacancy @ 8% (extremely unlikely): $128/month
    Grounds Keeping: $50/month
    Advertising: $10/month
    Maintenance/Miscellaneous/Forgotten Items: $83/month
    Total Expenses: $505/month

    Net Operating Income: $1,052/month
    Less Debt Service: -$815/month
    Cash Flow Before Taxes: $237/month

    Cap Rate: 7.43%
    Cash-on-Cash Returns: 8.37%
    Taxable Net Income     (after adding back depreciation, 27.5 yrs): -$142/month
    ====================
    ====================
    SCENARIO 2: RENTS ARE $1,700/MONTH ($850/UNIT)

    Purchase Price: $170,000
    Down Payment @ 20%: $34,000
    Loan Amount: $136,000 @ 6% (estimated interest rate...in process of talking to bank)
    PI: $815/month
    Gross Monthly Rents: $1,700 (@ $850/unit)

    Expenses (rounded)
    Taxes: $2,119/year = $176/month
    Insurance: $700/year = $58/month
    Vacancy @ 8% (extremely unlikely): $136/month
    Grounds Keeping: $50/month
    Advertising: $10/month
    Maintenance/Miscellaneous/Forgotten Items: $83/month

    Total Expenses: $513/month

    Net Operating Income: $1,144/month
    Less Debt Service: -$815/month
    Cash Flow Before Taxes: $329/month

    Cap Rate: 8.08%
    Cash-on-Cash: 11.61%
    Taxable Net Income     (after adding back depreciation, 27.5 yrs): -$50.75/month

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

    When you look at the numbers there, they look ok. But when you really put all your returns in there, I think you'll get a little bit of a better picture. Don't forget your principal paydown. Don't forget your appreciation (even if you're only going to figure 1% a year). Don't forget the tax benefits.

    Then show your true cash on cash returns. Also, if you are getting 20k less, then you might want to factor in some equity capture into your returns as well.

    But to me, the biggest thing is that you're going to have a great rental for most likely the rest of your life as the thing is going to be brand new. No roof for 20 years. No furnace replacement for 10? 15? Those things are huge.

    And lastly, lets not forget that while your net profit before expenses may be a little tight now. Your payments are going to be locked in for 30 years so as your rents grow, your returns will continue to get bigger.

    My point is if you're not having any luck finding decent deals right now and you have the capital to do this plus still have some left after you do it for any deals that you do find, why not go for it. It'll get you into the game so you can start building credibility with the banks (i.e. I have 2 units, 3 units, 5, etc). And the returns are going to end up being pretty solid over the long haul. Far better than any stock or bond you could put your money in. That I can say with some certainty - provided you include all the ways real estate provides a return on your money.

    One thing you may way to try is seeing what rents those units might be able to support. Have you seen rent rates for brand new townhomes? Or are you compairing rents against some of the older product? You'd be surprised what people would pay for a brand new construction home/duplex.

    I'd consider listing at 900/mo and see what kind of response you get. If you have to drop down to 850/mo then you can. But brand new construction has some significant sway with what people will pay to rent.

    btw: Why are you putting anything in there for groundskeeping? Is there an HOA? If not, just have the tenants mow their half of the yard.

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  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    13y
    Originally posted by Brandon Hicks:
    Take that $38k and get creative.
    With that much money I could structure deals for 40-50 units or more!

    Easier - just go to Las Vegas and put the $38,000 down on one dice roll. FYI- I do have more than that in cash, so I'm not some broke guy spouting off. Big leverage = even bigger risk.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    13y

    @Mike H.

    Thanks for helping me to keep this thread alive. I thought, for a moment, that I might need to re-create the topic. Yes, I'm absolutely with you on factoring in the other elements to the total return. I, too, believe they're important to consider. My numbers were based on what I believe is a fair and conservative estimate. I used the REIPropertyAnalyzer spreadsheet found on BiggerPockets to help me with the numbers. Are there other user-friendly spreadsheets that factor in these other return components?

    As for your question about rent rates, these are all brand-new duplexes in a new development. There are some duplexes, a section of single family homes, and then another section of duplexes (this is where I'd likely be building). I've seen the rent range from $795 - $850 for these; they're all identical duplexes. I was thinking of trying to possibly get $900 and bring it down to $850 if needed.

    There isn't any HOA. I figured, as the landlord, that it is my responsibility to care for the yard. Is it not? I know you can negotiate this with certain tenants, but I thought that it's up to me by default.

    @Stephen Masek

    Stephen, it's pretty clear from many of your posts on BiggerPockets that you're a successful real estate investor; you certainly aren't shy about letting people know that. It's people like you that newer investors like me could learn a great deal from. It's also people like you with a bad, sarcastic attitude that discourage newer investors like me from asking questions for fear that we're constantly being judged for our ignorance. If you can add value in a non-condescending way, please do. If not, please get off my thread and allow those that are willing to be helpful, like @Mike H., to post. If you're going to critique others, maybe you should start with the correct spelling of "real estate" in your profile.

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  • Matt Mason
    Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
    13y

    @Stephen Masek

    How do you figure your $115k deal with $1200 in rent is a much better deal than this duplex at $170k with $1600-$1700 rents? I suppose a little of this may be that he initially presented it at a purchase price of $190k not $170k, but now I see little to no difference.

    His property taxes are a little over 1%, which is pretty low and his property is new and yours is over 15 years old. He also has the ability to self manage if he chooses.

    The only real difference i see seems to be that you used all cash. Most people don't want to dump all their capital into one house or two, which is what most people would have to do unless they have 7 figures sitting around.

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  • Matt Mason
    Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
    13y

    @Mark S. , I'd double check the property tax amount. Just because the builder is paying that amount now doesn't mean you would and now you are looking at a $170k amount I'd bet it is different. All depends on how your property taxes work in your locality. Shoud be easy to research.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    13y

    Hey @Matt Mason , thanks for your responses. I am planning to self-manage, as these will be my first two units and I'm dead set on proper tenant screening. I want to make sure it's done right; if they sit vacant a tad longer, so be it.

    As for the property taxes, the assessed values on the PVA website for these units (remember, they're all identical in a row), ranges from $185,000 - $188,500 and the tax per thousand is 11.15. Even if I buy at $170,000 and they say it's worth $188,500, my taxes are still only $2,101. Is this what you meant?

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  • Matt Mason
    Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
    13y

    @Mark S. , I would think if you buy at $170k, you might be able to argue that is the worth and thus assessed value, but depends on jurisdiction.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    13y

    So, basically my taxes COULD BE even less than estimated? Which would make my deal even BETTER than originally thought? :-)

    A question I have is about what level of reserve the banks will likely want to see. I am planning on backing out some Roth IRA contributions for the down payment. Cash is definitely a bit tight. What should I be shooting for?

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  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    13y
    Originally posted by Mark S.:
    @Mike H.

    ...add value in a non-condescending way..

    Not at all, just realistic and trying to be helpful. Misunderstandings are more likely when people have not met, and is easier now, than ever, for people who have not met to be in contact. It will be interesting to see how it all goes looking back 20 years from now.

    This thread is all about a deal with risk with a Capital R. I'm just trying to help people avoid learning the hard way, as there is so much hype encouraging people to make giant gambles without proper analysis of risk. What happens if x, y, and z, what is the probability of each, and how would each be handled. That is just good old fashioned management. Real estate investing is, after all, a business.

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  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    13y
    Originally posted by Matt Mason:
    @Stephen Masek
    How do you figure your $115k deal with $1200 in rent is a much better deal than this duplex at $170k with $1600-$1700 rents? ...all cash...

    The cash makes all the difference in the world, especially since there are reserves behind it. Look at what happens on a super-leveraged deal if a minor event such as a bad water heater or air conditioner failure occurs, or more significant event such as a tenant needs to be evicted or major repairs are needed, or macro things happen, such as a local factory closing or jobs lost due to Obamacare.

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  • Matt Mason
    Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
    13y

    @Stephen Masek I am all for having reserves and you def. need some. I just don't think similar deals with one done all cash is a home run, while the other that is financed is terrible.

    In some ways the all cash deal is more risky, because more capital is at risk in case of an area going Detroit. For instance if a house becomes unrentable the entire $115k is gone versus less than $30k in the financed version.

    @Mark S. , I'd make sure you have reserves before getting into this. If you building the duplex, I would think you'd have quite a bit of time to do this possibly.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    13y

    @Matt Mason
    Yeah, that's my #1 hesitation right now: not having enough reserves. I'm planning to really bulk up my savings over the next few months into the new year. That, coupled with a large expected tax refund, and I should have about what I need to get everything under contract. 3-4 months later when it's finished, I'll be more than ready to go.

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  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    13y
    Originally posted by Matt Mason:
    @Stephen Masek

    In some ways the all cash deal is more risky, because more capital is at risk in case of an area going Detroit.

    Such events do not happen overnight or by surprise.

    0Reply
  • Tom A.
    Investor · West Bloomfield, MI · Member since 2009 · 358 posts · 306 votes
    13y

    I just read all the posts. Advice seems to be running 10:1 toward don't buy, with well justified reasoning. Original poster takes the one answer they were predisposed to agree with, buy, and is pretty much running with it. Interesting approach. I'd love a 5-year follow-up post.

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  • Tom C.
    Investor · Kingwood, TX · Member since 2012 · 97 posts · 21 votes
    13y

    Mark, you have to realize that the deal you are highlighting is far from the holy grail of real estate investing that a lot of “buy and hold” investors are looking for... With cash in the bank, most of the guys on there would be looking for a total “crap house” they could buy for $80K, spend $20K in like-new repairs to then appraise the property for $125K.If you can swing this you can then do a cash-out refinance and pull out your entire $100K and have a 80% leveraged property that will cash flow in a lot of areas of the US (and you have your cash back).The goal is to put your money into a property and add sweat equity…Then take your money back OUT… then repeat. I am not saying that this always works, but none-the-less the less of your money you have tied up in a thirty-year endeavor the better off you will be.As such, we try (sometimes naively) to commit to a project in hopes that it plays out in the real word as it does so nicely on paper sometimes.

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  • Mark S.Pro Member
    OP
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 539 votes
    13y

    Hey Guys,

    I appreciate all the feedback I've received so far. I've done a lot of thinking, reading, listening to the Podcasts, etc., and have decided that I will start my long term buy-and-hold multi-family strategy locally, here in Kentucky.

    It seems like many people think I should explore a different starting direction, although there are several that agree with what I'm considering. For those that may not have read the entire post, the purchase price was originally $190K and now we're looking at $170-$175K.

    Here's where I need advice now:

    I have spoken directly with the builder and suggested we move forward without a realtor involved in order to minimize costs. I also informed him that a good friend of mine was looking to have the exact same duplex built, so we'd be doing two at the same time in the same area. This is partly how the price came down to where it is.

    My plan is to continue to build up cash over the next several months and sign a contract in February/March of 2014. Since I'll be dealing directly with the builder, I would like to know what I can do to best protect myself - spend the $ and get an RE attorney to review everything, use a certain type of contract (something that's general that I can download online and use), big things to look out for, etc.

    Again, this gentleman built my primary residence for me in 2012, so there is already a degree of trust there. We had a couple of minor hiccups, but no where near the horror stories you hear out there from people that are building. He realizes I'm bringing him additional business (myself and my buddy), and that I'll likely continue that in the future. Therefore, he should have no reason to try to screw me, but he obviously also needs to make a living. I just want to make sure that it's a great deal on all sides.

    Any feedback on ways to approach this (other than telling me not to do it, haha) would be greatly appreciated. Thanks, guys, in advance!

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