Duplex Deal or No Deal?

Question

Guys,

I would like to know your opinion on this duplex deal i am planning to make an offer on.

its a 2/1 up and down in a good area. rent estimate for the area are $650 , i predict the upper will go easily for 500 and lower for 800.

Price:- $83.9k

Taxes:-$2100, 175 per month

Rent:- $1350 (conservative)

insurance:- $70

management:-$130 (10%)

maintenance(7%) $91

vacancy rate:- (8%) $108

cash flow: $427

cash on cash financed:- 27.9%

cap rate:- 10.4%

It looks good on paper to me what are the things I am missing here?

Stanley H. · Answer

@Jean Bolger  @Jon Tyler

Thanks for your guidance. I think you guys are right I should take into account the lease up fee etc...

Thanks for pointing the utilities, i missed out on H2O which would be 1200 per year.

Also i bummed up my maintenance to 10% and management to 15% and reduced rent to 1300

I now get an cash flow of $285 doesn't look so rosy now :(

cash on cash financed:- 20.4%

cap rate:- 9.0%

Jean Bolger · Answer

How about utilities? Since you didn't mention it I assume the units have individually metered gas and electric, but most duplexes do not have separate water billing. (don't think I've ever seen that on an up/down duplex, actually) You can get the actual  costs by calling the utilitiy companies and asking for the last year's average.

I'd say your maintenance estimate is low. You're looking at $1092 a year, or $546 per unit. Eventually both of the places will need a furnace or something else big, so bear that in mind. What's the construction? Is there any exterior painting? That can be a larger expense than some folks expect.

Lawn/landscaping? You can sort of get tenants to take care of their own side of the yard with a side by side duplex. With an up/down you'll probably need to have a third party deal with it.

Also, if you think the places will rent for $800 and $500, then that's $1300 (right in line with that $650 rent estimate). So using $1350 for your estimate is actually optimistic, not conservative. You might get it, of course! just don't bet the farm on it.

I think you could do fine with this; I just think your estimation of the return is a bit too rosy right now.

Jon Tyler · Answer

I'm concerned your management estimation may be low. For instance, in my area, it's not uncommon for the Leasing Fee to be 6% of the annual gross rent with 10% management every month thereafter. On a $1000 (picked for simplicity) the leasing fee would be $720 ($1000 x 12 months x 6%) and the management would be $1100 ($1000 x 11 months x 10%) for a total of $1820. Since the lease is for $12,000 this means management costs are 15.167% ($1820 / $12,000).

You may be able to negotiate these fees, but remember that you get what you pay for. A good manager is hard to come by and will save you more in the long run than they cost.

Stanley H. · Answer

Current rent according to the owner is 900 bottom and 500 top but i feel thats too much.

Stanley H. · Answer

The estimates are based on comps, current rents are family members of the owner.

I think even with the 50% rule the cash flow comes to be $375 for the duplex.

I feel the issue you talked about should come to notice on home inspection.

Todd Curtis · Answer

Be careful on the estimated costs and revenues. You said the estimated rent was 800/500. Is this based on documented payments from current renters, or area comps?

I'd also be more conservative on the maintenance and vacancy rate, unless you have documented the past repairs and maintenance for this property.

Also, get some sort of independent estimate of the kinds of deferred maintenance that has to be dealt with, and also the chance that you have to deal with a major repair issue.

Lastly, do you have plan in place on what to do if the keeping this as a rental becomes too much of a hassle?

Todd