Duplex for my first investment property...what am I missing?

Question

I've been looking into and researching investment properties for a very short time. Just out of curiosity, I looked up some properties that are for sell and found a duplex for $180k.

Both units (3 room 2 bath each) are currently being rented for $850/month and the tenants pay the utilities.

It's in a decent neighborhood (very low crime) and is about a five minute drive from a division II college.

As far as I know, it's in pretty good shape too. Of course, I don't know that for sure because I haven't been to the physical location or had an inspection.

I talked to the realtor and she said even though rent is at $850 she thinks that is too low.

Looking at things on the surface, it seems like that is a good deal. Am I missing something obvious?

Carl Dean · Answer

Those numbers are not terrible. Couple things to look at/consider...

#1 rule with investing... don't ever trust a realtor and always get a second (non bias) opinion on value and rents.

Can you really raise the rents? How? Better curb appeal, carpet and paint, simple turn over... what would it take to increase 100 on each side and when are the leases up? Also, when is the last time the rents were increased and how long have the tenants been in there?

Who manages the home? If a company, I would look into their process for approval and get the tenant info. If personally managed be careful, people will supplement the rents and do all kinds of things to make a deal look better.

What are the schools like on Zillow? ( not a Zillow fan either but its good for schools)

Always get a physical inspection by a pro, don't EVER take a chance and do this without someone knowledgable with investment properties. You could miss the smallest lead and in 6 months have a 30k mold issue on your hands ( I have been there).

I like duplexes next to schools. If crime is actually low (Trulia crime has a good report but be sure to click in twice from the default where they set the map at), then it could be a good purchased if its in a good area.

I would gladly take a glance at the pics ad info and give you a 5 minute opinion. What is the NET ROI on the prop? Curious the taxes, also be sure when looking at the sheet to account for management fee in case the previous owner is self managing and does not have it on there.

Always willing to help in my free time.

CD

Stephen Quesinberry · Answer

@Dallas Bass right off the bat with it not meeting the 1% rule then you're likely to find the numbers won't be great on the CoC return side.

What type of CoC return will this be? What is your criteria?  Are you looking for a specific dollar amount of cash flow per door? Being able to know those numbers will tell you if you are missing something obvious.

Jim Cummings · Answer

Buy it on the basis of what the CURRENT RENTS ARE (Performa)  -Not what someone says they SHOULD BE (Proforma)! If rents should be a $1000 - Why aren't they?

Bart H. · Answer

I was thinking the same thing.  We just sold a duplex last year near lower Greenville and Live Oak in the mid $300's.  $270-$280 is about the cheapest I have seen in  Dallas in the last year or two that wasn't either falling down, really small or in a war zone.  And I have been watching this market pretty closely for the last 4-5 years.

Andrew Herrig · Answer

@Dallas Bass What town is this in? I see you are in the DFW area. I'm assuming it's not Dallas as those rents would either be very low or else it's in a war zone. I would think a little outside the metroplex you should be able to do better than the 1% rule.

Bart H. · Answer

Its a little short of the 1%.

I would look at things like Plumbing, Electrical, Foundation, Roof.

Is it separately metered for water, gas and electric?

Did you use the online tools to see if your deal makes money?

Best of luck to you!!!

Dallas Bass · Answer

Hey Andrew, I think you misunderstood. Each unit is being rented for $850 each, so $1700 total. I should have made that more clear in my original post.

Andrew Michael · Answer

What is a typical return in Texas?  This does not even meet the 1% rule.  That does not mean it is a bad investment but what kind of return are you looking for?  Would need more info to really get a thorough breakdown.