All Forum Posts by: Dan H.

Quote from @Jonathan Klemm:

Hey there @Asim Purses - What is your LONG TERM plan with the building?  

If it's holding it indefinitely, then the best option, if you have the cash, is to legalize the basement. You would first have to verify if this allowed based on your current zoning, if not then check to see if you are in a pilot ADU area. If neither is an option then you would either have to get a zoning change or duplex down to LEGALLY use the space.  In the Long term, this will be the highest and best use and will generate the most appreciation (what area of the city is your property in?)

Maybe more importantly, you need to understand the difference between ILLEGAL & NON-CONFORMING.  Illegal is if there are violations or the city has deemed the area uninhabitable.  Non-confirming means that the space does not comply to current zoning/building code but there is no active violations.  MOST Chicago garden units are non-conforming and rented out to generate cashflow.

non-comforming in my market means it was legal at the time of the build and is no longer legal.  It does not apply to work that was never legal, but has not yet been tagged as illegal.  Work that was never legal is usually referred to as unpermitted addition/work in my market.

Both present risks.

Non-conforming may not be allowed to be rebuilt in the event of it getting destroyed (red tagged).

Work that is unpermitted can often be made to be removed in cases where it is not allowed by current code so it presents a higher risk.  Note in my market, safe unpermitted units built before the last year or 2 are protected by state (CA) law and a jurisdiction cannot mandate their removal.  Due to the housing shortage, the state does not want safe units to be removed.

Good luck

If you are considering LVF, they have new products that are PVC based.  They are supposed to be more scratch resistant and they cost slightly less while looking as good as LVF.  It installs just like LVF.  LVF does not look cheap.  Cheap vinyl flooring looks cheap, but that is not LVF.  

I hope the marketing claims are accurate on the PVC based flooring as I am putting it in my 4th unit in the last year.  It does look nice.

Tile is much more costly the the PVC based flooring. 

Have you looked into concrete staining.  I have seen it in some class A local properties.  Can look great is done correctly, virtually indestructible, and fairly cheap (cheaper by far than tile).

Good luck

Quote from @Michael Cosstephens:

Currently looking at a deal that includes 2 duplex and 3 SFH. Old man died and the wife wants to sell the portfolio. Columbus, Ohio market

Currently the asking price for all the structures is roughly $700,000. The ARV on all of them is around $1.3M I am a general contractors and have done about 6 Flips over the last few years, so this would be my first stab at having rentals.

I have estimated that it will take about $150,000 to rehab them all over the next 2 years. They currently have long term renters that have been in the properties for over 10 years well below market rents.

Current rents are around $4000 per Month. Market Rents would be around $7000 (conservative Estimate) 

I have the comps, Iv dug through the deal for hours each night trying to find an issue, but my limited experience leaves me staring at the screen with no real direction

Finance proposal is this

$400,000 HELOC from my primary residence at 10% (broker deal)

$300,000 Seller Finance at 5% for 5 years based on 20 year schedule. Monthly payments until month 60 then pay the deal off.

This will leave me with about $100k in the bank of working capitol to upgrade the houses and have a safety net for something that goes wrong.

The question is will this thing cash flow? Can I get on top of this in year 2 or 3 and get these large debts paid down or refi so Its digestable.

The $700k in loans with these terms are going to swallow up all the $ early on from what I can tell, but then again I really cant see the finish line. Everyone I speak to says this is a great deal, but they also have limited experience.

If I need to offer more info I am happy to do so.

How sure are you of the ARV and value add costs?  I have never achieved as high a return as $150K resulting in $600K of value (basically a 4X).  I do not do the value add unless in projects at least 2x, but typically I am not achieving much better than 2x (I am not sure if I have ever gotten 3x).

I think the rent point is too low to warrant keeping the properties as the cash flow will be challenging.  Do the numbers work as a flip?  $850k to obtain $1.3M is $450K minus transaction costs and holding costs.  If you can do rehab and sell quickly, maybe $100K for transaction and holding costs.  Is this effort worth doing for $350K?

5 properties would mean an average of $70K per property.  My self imposed criteria (for BRRRR - I do not flip) is a minimum of 2X rehab costs and a minimum projection of $70k.  This meets both those criteria as a flip, but flipping is a job; stop flipping and stop earning.

Good luck

Quote from @Cameron Miller:

Quote from @Dan H.:

Quote from @Cameron Miller:

Quote from @Dan H.:

Quote from @Cameron Miller:

Quote from @Dan H.:

Quote from @Cameron Miller:

Duplex opportunity

I am from michigan and take home about 4k per month after taxes, 401k,insurance etc as a RN which ive been for 2 years. I have been wanting to buy a house for the past 5 years and never pulled the trigger. I currently rent and am very frugal , no debt, drive a used car, have a roth ira etc

I have an opportunity to get a 1980 4 bed 4 bath ranch duplex ,full basement , one car garage per side,, new roof, original mechanicals duplex from a family member off market in a solid B to B+ area/country setting 1.5 miles outside of east side of city of 150k people. This side of town is mainly B to A- neighborhood. The duplex is on a road of duplex and single family all in the 220-320k range.

Purchase price is about 280k

I would put 20% down so loan for 224k

Taxes are about 5k / year

Insurance is 2800 / yr escrow or 2500 in full

Mortgage rate 7% credit score 760+

Mortgage is $ 2150 ish. +/- 50$

Current rents are 1000 per side which they say is low because it's paid off for my family member

They say market rent is easily 1200 per side

I would likely inherit a tenant on one side at 1000/mo , older retired single guy

So if I house hacking and pay 1200 and raise their side to 1200 it's would cash flow about 150$ not including maintenance so. Basically for the first 2-4 years barely any profit , to squeeze more cashflow would have to pay down mortgage ,refinance 5 years later. be super frugal , raise rent slowly and hopefully not loose this tenant by raising their rent. Part of me wants to do this so bad but the numbers in this market are so tight and it only makes the 1% rule after my down payment. Basically any cashflow is for maintenance for about 5 years .

Any thoughts from experienced landlords? If I could put down more money obviously that would decrease mortgage but I need some left over for closing etc

 I cannot believe that some people with thousands up up votes think this could be a good opportunity.

Here are some thoughts/comments:

- At current rate and those rent points, 1% is large cash flow negative at high LTV.

- market rent is ~$2400/month but PITI is $2150. This leaves $250 for maintenance/cap ex, vacancy, PM (include it even if self managing because your time it worth something), book keeping, asset protection, misc. The $250 would not even cover the sustaining maintenance/cap ex on a single unit.

- The rent growth as reflect by the rent has not been great.

- The appreciation in that market is pretty good and exceeds inflation.  This seems likely to be the primary source of return.  https://www.neighborhoodscout.com/mi/grand-rapids/real-estat...

- raising rent to market rent has risk.  The unit is likely not in the same condition as units that have been unit flipped.  The longer the tenant has been in the unit, the further the unit is from being rent ready.  One month of vacany at $1K can cover 5 months of the $200.month rent difference.  Add in the cost of a unit flip and it could easily take over a year to recover the costs associated with the unit flip and the vacancy.

- I do not know how you derived your property tax estimate, but it is common for it to increase upon a property transfer.  Make sure your property tax estimate is accurate/

Good luck

Thank you Dan. This property is in lansing, MI. I property tax upon me taking over is hard to estimate but I think it will be around 5-6k/yr. This would be a house hack so sometimes the numbers won't work as well. And yeah the cashflow of 200$ likely would be eaten up by any Capex but considering this is an off market deal and a place to live and start investing . I wonder if it would still make senses

 Lansing has far worse historical appreciation than grand Rapids.  https://www.neighborhoodscout.com/mi/lansing/real-estate

If both units at $1200 (so after the house hack), the unit has $250/month before all expenses not included in the PITI. This implies the property is many hundreds a month negative. My rough estimate is $800/month. To get here you have to raise the rent $200 on the existing tenant. The $200/month increase would not by itself be of concern but you want to raise an existing tenant to full market rent when market rent are units that have been flipped. There is a good chance the tenant chooses to rent a unit that has been flipped and you have the cost of the unit flip and the loss of income associated with the vacancy.

It is a tough time to enter RE. Two recent studies show that in virtually every large city it is initially cheaper to rent than to owner occupy (OO). Note that investors have costs that the OO does not have including PM and vacancy. In addition, in some markets OO pay lower property tax than RE investor.

What you are proposing to purchase is a negative cash flow property, with poor rent growth and poor appreciation.  I can say with confidence that in the short term you are financially better off to continue renting.

Do conservative, thorough, and accurate underwriting.  Use the long term appreciation of 2.5% or less (remember conservative).  I am confident your underwriting will show that in the near term you are better off financially renting.

this will change if interest rates drop significantly or if property prices drop without an associated drop in rents  To be blunt, I think both are unlikely.  You will need to look for a killer deal for the numbers to work.  This likely means off market listings.

Good luck

Yeah so right now my rent is 1200 which me and girlfriend split. So if we were to House hack this duplex. I would put 20% down and property tax of 5k / yr and insurance of 2500/yr would place the mortgage at about 2150$  we would act like Tenants and pay at least 1200 on our side and then have to raise the long term Tenants rent to 1200 Initially. So yes about 250$/mo in cashflow. Once he moves out or whiles he is there maybe we can do some updates to raise rent more about 3% per year. But if they move out definitely have costs to get unit to market rent which according to rentometer is 1400-1600 ish for 2bed 2 bath apartments and 11-1300 for 2 bed 2 bath houses within a 5 mile radius. So obviously it's not a great cash flow deal initally. and it was purchased in 2005 for 150k   now worth about 280-300k so 4% per year. I would be dependent on paying down mortgage aggressively and refinancing later to increase cash flow and slowly increasing the other units rent while I live there. I definitely don't have much experience but would want to get started somewhere. And this is an off market deal

In my market if the apartments have no amenities the SFH rent for more. This leads me to speculate that the apartments have amenities like pool/spa, fitness room, bbq area and may not be good comps. Do you have the Rentometer pro? Can you see the comps used?

By the way BP has a rent estimation tool.  I use Rentometer, BP, and Zillow rent estimators.  If they all come in similar it is likely that they are accurate.  Quite often they show large variance.  In all cases I look at comps and eliminate the ones that do not apply.

It is my belief your duplex unit will come in at the low range of the SFH. It likely does not have the amenities of the apartments and what advantage does it have over the typical SFH?

I do not refer to rent minus piti as cash flow but recognize some people do.  My cash flow number is the cash flow reflected after extracting off all sustaining expenses.  This implies even if it has a new roof, I allocate the monthly cost for the next roof which in my market is about $50/month for detached asphalt shingle.  

You have 2 units with maintenance/cap ex (likely at least $300/month per unit), pm (likely at least 10% at those rent points), vacancy (in my housing shortage market I still allocate 5%, but in a typical market I would allocate 10% and have it include delinquent rent), book keeping/tax prep, asset protection (could be $0 when starting out), miscellaneous (such as water Cost from a slab leak - I just had a $3k water charge due to leak that I picked up because tenant did not use the water and it would not be fair to charge them for it). 

Unless the interest rates fall or you have a large value add, I see no advantage to paying down early to refinance. I am not betting on a significant rate decline. I exert effort to keep my LTV high to maximize my benefit from leverage. To pay down the cheapest money available is foreign to me. I strive to keep 70% LTV or higher and am failing badly in this environment even though I refinanced everything between Dec 2020 and Dec 2021 (if fed states that they are going to raise rates it is generally a good idea to believe them). I suspect I am a bit lower than 50% LTV currently.

note if it is a good home for you and your family, it does not have to be a good re investment for it to be a good purchase.  Just recognize this and understand it will not lead to return that is likely to positively affect your life.  Even if the cash flow was $250/month for 2 units ($125/unit), it is not enough to have that cash fliw positively affect your life.  Also at that cash flow, you basically are getting compensated for managing as a pm likely would charge at least $240. 

My time is worth much more than a pm makes from managing properties.  In addition, your sustained cash flow is not $250/month and is negative (the maintenance/cap ex, pm, and vacancy places this many hundred dollars a month negative).

Financially in the near term you are better off renting.. If you believe this is a good home for you and your family, then the financial performance is less of a criteria.

Good luck

Thank you Dan for all the info and thoughts. I really appreciate it. Your right it does not make sense numbers wise as a RE investment in the beginning if I put the numbers into a rental property calculator at 280k purchase price 20% down 7% interest 2500/yr insurance 3 % annually rise 5000/yr taxes with 3% annual rise $2500 maintenance 3% annual rise and then 2400 in starting rent with 3% annual rise. Over a 20 year period the capped rate is 6% IRR is 10% per year and cash on cash return is 533%

 Leveraged property tends to be forgiving over long holds. 

For example if you could maintain that 80% LTV, a modest appreciation of 4% equates to 20% return from appreciation due to the leverage. If inflation is 2.5% (not recently but a decent long term expectation) then you produce 17.5% above inflation. Add in the equity paydown for further return.

In your case you will be subtracting off a large negative cash flow. Your maintenance is not high enough to cover sustained maintenance/cap ex on a duplex.  Where is vacancy and PM?  If my $800/month negative is accurate then $9.6k/year negative.  4% appreciation is $11.2k so most of the appreciation gets consumed initially by the negative cash flow.   Ideally the cash will increase with time as the largest expense (P&i) is fixed cost.   The equity paydown does improve with time, but not substantially until deep into the term. 

Ideally in a dozen years the property has some cash flow and the appreciation and is providing a solid return.   That is a long time and yet RE is now a long game.  In the short term, you are better off financially continuing to rent.  In the long term you may do good buying versus renting.   I am not that patient.  I want gains soon after acquisition.  

Good luck

Quote from @Cameron Miller:

Quote from @Dan H.:

Quote from @Cameron Miller:

Quote from @Dan H.:

Quote from @Cameron Miller:

Duplex opportunity

I am from michigan and take home about 4k per month after taxes, 401k,insurance etc as a RN which ive been for 2 years. I have been wanting to buy a house for the past 5 years and never pulled the trigger. I currently rent and am very frugal , no debt, drive a used car, have a roth ira etc

I have an opportunity to get a 1980 4 bed 4 bath ranch duplex ,full basement , one car garage per side,, new roof, original mechanicals duplex from a family member off market in a solid B to B+ area/country setting 1.5 miles outside of east side of city of 150k people. This side of town is mainly B to A- neighborhood. The duplex is on a road of duplex and single family all in the 220-320k range.

Purchase price is about 280k

I would put 20% down so loan for 224k

Taxes are about 5k / year

Insurance is 2800 / yr escrow or 2500 in full

Mortgage rate 7% credit score 760+

Mortgage is $ 2150 ish. +/- 50$

Current rents are 1000 per side which they say is low because it's paid off for my family member

They say market rent is easily 1200 per side

I would likely inherit a tenant on one side at 1000/mo , older retired single guy

So if I house hacking and pay 1200 and raise their side to 1200 it's would cash flow about 150$ not including maintenance so. Basically for the first 2-4 years barely any profit , to squeeze more cashflow would have to pay down mortgage ,refinance 5 years later. be super frugal , raise rent slowly and hopefully not loose this tenant by raising their rent. Part of me wants to do this so bad but the numbers in this market are so tight and it only makes the 1% rule after my down payment. Basically any cashflow is for maintenance for about 5 years .

Any thoughts from experienced landlords? If I could put down more money obviously that would decrease mortgage but I need some left over for closing etc

 I cannot believe that some people with thousands up up votes think this could be a good opportunity.

Here are some thoughts/comments:

- At current rate and those rent points, 1% is large cash flow negative at high LTV.

- market rent is ~$2400/month but PITI is $2150. This leaves $250 for maintenance/cap ex, vacancy, PM (include it even if self managing because your time it worth something), book keeping, asset protection, misc. The $250 would not even cover the sustaining maintenance/cap ex on a single unit.

- The rent growth as reflect by the rent has not been great.

- The appreciation in that market is pretty good and exceeds inflation.  This seems likely to be the primary source of return.  https://www.neighborhoodscout.com/mi/grand-rapids/real-estat...

- raising rent to market rent has risk.  The unit is likely not in the same condition as units that have been unit flipped.  The longer the tenant has been in the unit, the further the unit is from being rent ready.  One month of vacany at $1K can cover 5 months of the $200.month rent difference.  Add in the cost of a unit flip and it could easily take over a year to recover the costs associated with the unit flip and the vacancy.

- I do not know how you derived your property tax estimate, but it is common for it to increase upon a property transfer.  Make sure your property tax estimate is accurate/

Good luck

Thank you Dan. This property is in lansing, MI. I property tax upon me taking over is hard to estimate but I think it will be around 5-6k/yr. This would be a house hack so sometimes the numbers won't work as well. And yeah the cashflow of 200$ likely would be eaten up by any Capex but considering this is an off market deal and a place to live and start investing . I wonder if it would still make senses

 Lansing has far worse historical appreciation than grand Rapids.  https://www.neighborhoodscout.com/mi/lansing/real-estate

If both units at $1200 (so after the house hack), the unit has $250/month before all expenses not included in the PITI. This implies the property is many hundreds a month negative. My rough estimate is $800/month. To get here you have to raise the rent $200 on the existing tenant. The $200/month increase would not by itself be of concern but you want to raise an existing tenant to full market rent when market rent are units that have been flipped. There is a good chance the tenant chooses to rent a unit that has been flipped and you have the cost of the unit flip and the loss of income associated with the vacancy.

It is a tough time to enter RE. Two recent studies show that in virtually every large city it is initially cheaper to rent than to owner occupy (OO). Note that investors have costs that the OO does not have including PM and vacancy. In addition, in some markets OO pay lower property tax than RE investor.

What you are proposing to purchase is a negative cash flow property, with poor rent growth and poor appreciation.  I can say with confidence that in the short term you are financially better off to continue renting.

Do conservative, thorough, and accurate underwriting.  Use the long term appreciation of 2.5% or less (remember conservative).  I am confident your underwriting will show that in the near term you are better off financially renting.

this will change if interest rates drop significantly or if property prices drop without an associated drop in rents  To be blunt, I think both are unlikely.  You will need to look for a killer deal for the numbers to work.  This likely means off market listings.

Good luck

Yeah so right now my rent is 1200 which me and girlfriend split. So if we were to House hack this duplex. I would put 20% down and property tax of 5k / yr and insurance of 2500/yr would place the mortgage at about 2150$  we would act like Tenants and pay at least 1200 on our side and then have to raise the long term Tenants rent to 1200 Initially. So yes about 250$/mo in cashflow. Once he moves out or whiles he is there maybe we can do some updates to raise rent more about 3% per year. But if they move out definitely have costs to get unit to market rent which according to rentometer is 1400-1600 ish for 2bed 2 bath apartments and 11-1300 for 2 bed 2 bath houses within a 5 mile radius. So obviously it's not a great cash flow deal initally. and it was purchased in 2005 for 150k   now worth about 280-300k so 4% per year. I would be dependent on paying down mortgage aggressively and refinancing later to increase cash flow and slowly increasing the other units rent while I live there. I definitely don't have much experience but would want to get started somewhere. And this is an off market deal

In my market if the apartments have no amenities the SFH rent for more. This leads me to speculate that the apartments have amenities like pool/spa, fitness room, bbq area and may not be good comps. Do you have the Rentometer pro? Can you see the comps used?

By the way BP has a rent estimation tool.  I use Rentometer, BP, and Zillow rent estimators.  If they all come in similar it is likely that they are accurate.  Quite often they show large variance.  In all cases I look at comps and eliminate the ones that do not apply.

It is my belief your duplex unit will come in at the low range of the SFH. It likely does not have the amenities of the apartments and what advantage does it have over the typical SFH?

I do not refer to rent minus piti as cash flow but recognize some people do.  My cash flow number is the cash flow reflected after extracting off all sustaining expenses.  This implies even if it has a new roof, I allocate the monthly cost for the next roof which in my market is about $50/month for detached asphalt shingle.  

You have 2 units with maintenance/cap ex (likely at least $300/month per unit), pm (likely at least 10% at those rent points), vacancy (in my housing shortage market I still allocate 5%, but in a typical market I would allocate 10% and have it include delinquent rent), book keeping/tax prep, asset protection (could be $0 when starting out), miscellaneous (such as water Cost from a slab leak - I just had a $3k water charge due to leak that I picked up because tenant did not use the water and it would not be fair to charge them for it). 

Unless the interest rates fall or you have a large value add, I see no advantage to paying down early to refinance. I am not betting on a significant rate decline. I exert effort to keep my LTV high to maximize my benefit from leverage. To pay down the cheapest money available is foreign to me. I strive to keep 70% LTV or higher and am failing badly in this environment even though I refinanced everything between Dec 2020 and Dec 2021 (if fed states that they are going to raise rates it is generally a good idea to believe them). I suspect I am a bit lower than 50% LTV currently.

note if it is a good home for you and your family, it does not have to be a good re investment for it to be a good purchase.  Just recognize this and understand it will not lead to return that is likely to positively affect your life.  Even if the cash flow was $250/month for 2 units ($125/unit), it is not enough to have that cash fliw positively affect your life.  Also at that cash flow, you basically are getting compensated for managing as a pm likely would charge at least $240. 

My time is worth much more than a pm makes from managing properties.  In addition, your sustained cash flow is not $250/month and is negative (the maintenance/cap ex, pm, and vacancy places this many hundred dollars a month negative).

Financially in the near term you are better off renting.. If you believe this is a good home for you and your family, then the financial performance is less of a criteria.

Good luck

Quote from @Cameron Miller:

Quote from @Dan H.:

Quote from @Cameron Miller:

Duplex opportunity

I am from michigan and take home about 4k per month after taxes, 401k,insurance etc as a RN which ive been for 2 years. I have been wanting to buy a house for the past 5 years and never pulled the trigger. I currently rent and am very frugal , no debt, drive a used car, have a roth ira etc

I have an opportunity to get a 1980 4 bed 4 bath ranch duplex ,full basement , one car garage per side,, new roof, original mechanicals duplex from a family member off market in a solid B to B+ area/country setting 1.5 miles outside of east side of city of 150k people. This side of town is mainly B to A- neighborhood. The duplex is on a road of duplex and single family all in the 220-320k range.

Purchase price is about 280k

I would put 20% down so loan for 224k

Taxes are about 5k / year

Insurance is 2800 / yr escrow or 2500 in full

Mortgage rate 7% credit score 760+

Mortgage is $ 2150 ish. +/- 50$

Current rents are 1000 per side which they say is low because it's paid off for my family member

They say market rent is easily 1200 per side

I would likely inherit a tenant on one side at 1000/mo , older retired single guy

So if I house hacking and pay 1200 and raise their side to 1200 it's would cash flow about 150$ not including maintenance so. Basically for the first 2-4 years barely any profit , to squeeze more cashflow would have to pay down mortgage ,refinance 5 years later. be super frugal , raise rent slowly and hopefully not loose this tenant by raising their rent. Part of me wants to do this so bad but the numbers in this market are so tight and it only makes the 1% rule after my down payment. Basically any cashflow is for maintenance for about 5 years .

Any thoughts from experienced landlords? If I could put down more money obviously that would decrease mortgage but I need some left over for closing etc

 I cannot believe that some people with thousands up up votes think this could be a good opportunity.

Here are some thoughts/comments:

- At current rate and those rent points, 1% is large cash flow negative at high LTV.

- market rent is ~$2400/month but PITI is $2150. This leaves $250 for maintenance/cap ex, vacancy, PM (include it even if self managing because your time it worth something), book keeping, asset protection, misc. The $250 would not even cover the sustaining maintenance/cap ex on a single unit.

- The rent growth as reflect by the rent has not been great.

- The appreciation in that market is pretty good and exceeds inflation.  This seems likely to be the primary source of return.  https://www.neighborhoodscout.com/mi/grand-rapids/real-estat...

- raising rent to market rent has risk.  The unit is likely not in the same condition as units that have been unit flipped.  The longer the tenant has been in the unit, the further the unit is from being rent ready.  One month of vacany at $1K can cover 5 months of the $200.month rent difference.  Add in the cost of a unit flip and it could easily take over a year to recover the costs associated with the unit flip and the vacancy.

- I do not know how you derived your property tax estimate, but it is common for it to increase upon a property transfer.  Make sure your property tax estimate is accurate/

Good luck

Thank you Dan. This property is in lansing, MI. I property tax upon me taking over is hard to estimate but I think it will be around 5-6k/yr. This would be a house hack so sometimes the numbers won't work as well. And yeah the cashflow of 200$ likely would be eaten up by any Capex but considering this is an off market deal and a place to live and start investing . I wonder if it would still make senses

 Lansing has far worse historical appreciation than grand Rapids.  https://www.neighborhoodscout.com/mi/lansing/real-estate

If both units at $1200 (so after the house hack), the unit has $250/month before all expenses not included in the PITI. This implies the property is many hundreds a month negative. My rough estimate is $800/month. To get here you have to raise the rent $200 on the existing tenant. The $200/month increase would not by itself be of concern but you want to raise an existing tenant to full market rent when market rent are units that have been flipped. There is a good chance the tenant chooses to rent a unit that has been flipped and you have the cost of the unit flip and the loss of income associated with the vacancy.

It is a tough time to enter RE. Two recent studies show that in virtually every large city it is initially cheaper to rent than to owner occupy (OO). Note that investors have costs that the OO does not have including PM and vacancy. In addition, in some markets OO pay lower property tax than RE investor.

What you are proposing to purchase is a negative cash flow property, with poor rent growth and poor appreciation.  I can say with confidence that in the short term you are financially better off to continue renting.

Do conservative, thorough, and accurate underwriting.  Use the long term appreciation of 2.5% or less (remember conservative).  I am confident your underwriting will show that in the near term you are better off financially renting.

this will change if interest rates drop significantly or if property prices drop without an associated drop in rents  To be blunt, I think both are unlikely.  You will need to look for a killer deal for the numbers to work.  This likely means off market listings.

Good luck

I appear to be in the minority, but I claim you do not have enough allocated for maintenance/cap ex. You have less than $1200/month for 5 units or $240/month per unit. This is too low. Also just because items are new, does not mean you do not estimate their monthly cost.

My next comment is that this seems like a big take down for a newbie. I am used to most RE investors starting with something a bit less complex like a traditional duplex and work up to a mixed use 5 unit.

I include PM fees even when self managing.  Is your time free?  If not, then include compensation.

It is my belief at that rent point per unit, the property is cash flow negative when properly allocating for sustained expenses.  Furthermore, the rent growth appears to be poor.

In addition at that price point, the historical appreciation seems poor and below inflation

Lets say your numbers are accurate (which I believe they are far too aggressive), do you really want to own.manage 5 units for $250.month or $50/unit. 

This deal is missing margin for any issues, produces poor (likely negative) cash flow, and has poor appreciation outlook.  For me to consider such a purchase, it would need to have a killer value add.

I had a purchase once that the insurance over 2 years went from reasonable to $6k (it got his by hurricanes in consecutive years - Gulf Shores).  my underwriting depicted good cash flow, but after the insurance increases my cash flow was significantly worse than I had forecast.  It was not the end of the world, because I did not invest on thin margins.  I still had positive cash flow but far worse than I had forecast,

I recommend you keep looking.

Good luck

Quote from @Cameron Miller:

Duplex opportunity

I am from michigan and take home about 4k per month after taxes, 401k,insurance etc as a RN which ive been for 2 years. I have been wanting to buy a house for the past 5 years and never pulled the trigger. I currently rent and am very frugal , no debt, drive a used car, have a roth ira etc

I have an opportunity to get a 1980 4 bed 4 bath ranch duplex ,full basement , one car garage per side,, new roof, original mechanicals duplex from a family member off market in a solid B to B+ area/country setting 1.5 miles outside of east side of city of 150k people. This side of town is mainly B to A- neighborhood. The duplex is on a road of duplex and single family all in the 220-320k range.

Purchase price is about 280k

I would put 20% down so loan for 224k

Taxes are about 5k / year

Insurance is 2800 / yr escrow or 2500 in full

Mortgage rate 7% credit score 760+

Mortgage is $ 2150 ish. +/- 50$

Current rents are 1000 per side which they say is low because it's paid off for my family member

They say market rent is easily 1200 per side

I would likely inherit a tenant on one side at 1000/mo , older retired single guy

So if I house hacking and pay 1200 and raise their side to 1200 it's would cash flow about 150$ not including maintenance so. Basically for the first 2-4 years barely any profit , to squeeze more cashflow would have to pay down mortgage ,refinance 5 years later. be super frugal , raise rent slowly and hopefully not loose this tenant by raising their rent. Part of me wants to do this so bad but the numbers in this market are so tight and it only makes the 1% rule after my down payment. Basically any cashflow is for maintenance for about 5 years .

Any thoughts from experienced landlords? If I could put down more money obviously that would decrease mortgage but I need some left over for closing etc

 I cannot believe that some people with thousands up up votes think this could be a good opportunity.

Here are some thoughts/comments:

- At current rate and those rent points, 1% is large cash flow negative at high LTV.

- market rent is ~$2400/month but PITI is $2150. This leaves $250 for maintenance/cap ex, vacancy, PM (include it even if self managing because your time it worth something), book keeping, asset protection, misc. The $250 would not even cover the sustaining maintenance/cap ex on a single unit.

- The rent growth as reflect by the rent has not been great.

- The appreciation in that market is pretty good and exceeds inflation.  This seems likely to be the primary source of return.  https://www.neighborhoodscout.com/mi/grand-rapids/real-estat...

- raising rent to market rent has risk.  The unit is likely not in the same condition as units that have been unit flipped.  The longer the tenant has been in the unit, the further the unit is from being rent ready.  One month of vacany at $1K can cover 5 months of the $200.month rent difference.  Add in the cost of a unit flip and it could easily take over a year to recover the costs associated with the unit flip and the vacancy.

- I do not know how you derived your property tax estimate, but it is common for it to increase upon a property transfer.  Make sure your property tax estimate is accurate/

Good luck

Quote from @Chris Barrett:

Hey Dan, what do you underwrite for cap ex/repairs? I underwrite 10% cap ex, 10% property management, then subtract insurance, P&I, then taxes. Personally I management my own properties, so they sit at around a 25% expenses + P&I. 

I don't know much about the OPs situation or locale, but I would guess it would make a couple hundred bucks a month? It's not a great buy, I wouldn't do it unless it was in an area where the renovations make it a homerun. 

Using a percentage of rent is not a good way to allocate maintenance/cap ex.  I recognize many calculators (including the BP calculator) represents maintenance/cap ex as a percentage.  I believe this is a disservice.  I will show by some examples why using a percentage is not a correct approach:

- 2/1, 650' bathroom in mission beach rents for $5k/month.  4/2 in Escondido rents for $3400/month, 1400'.  These are 2 units in my portfolio and I will say the Mission Beach is 5 homes from the boardwalk and that 2/1 on the boardwalk rents at over $6.5k/month.  Which property will have the higher maintenance/cap ex?  The cheaper rent property due to size and double the bathroom count is expected to have the higher maintenance/cap ex.
- 3/2 in class A area rents for $6k month, 3/2 in same city class D rents for $2.5K.  Which do you think will have higher maintenance/cap ex?  Clearly in general the class D will have the higher maintenance/cap ex.

What I recommend is every RE investor populate a spreadsheet with current replacement costs and expected average life span in months for every item on the property to determine the expected monthly maintenance/cap ex.  I used to do this for each acquisition, but have only done one in recent years (because it was a condo (I have no condos in our portfolio) in a new market (Emerald Coast)).  Because I have done many in my market, I have a decent estimate for my market.  My last underwriting was a 4/3/1, 3200' and I used $600/month for maintenance/cap ex.  What I know is every time I do one of these in a new area I am shocked at the sustaining maintenance/cap ex.

My market has a more expensive hot water heaters (low NOX) than most markets (versus most parts are the same cost in all markets).  My contractor (not handyman) water heater replacement is $1600 (which is cheaper than most will get in my market).  If I use expected life of 10 years (reality is I get a little longer than this on average but I also have some costs like pilot light starting or a part replacement) is $13.34/month maintenance/cap ex on a water heater.  

The total costs of all items adds up.  Many years ago, my smaller attached units had $300/month allocated, but this is too low now for my market.  Around 2 years ago I did a condo with no exterior costs (the exterior costs were in the HOA fee) and calculated around $300 for a moderate size condo (3 bedroom).  I took input from the RE agent we were using in that market on expected costs (because some costs are market specific such as our expensive water heaters).

I think you do this and you will find 10% is far too low for a sustaining maintenance/cap ex in most markets (exception for high rent markets).  You can attempt to sell with deferred cap ex, but you may need to sell at a price that reflects the deferred cap ex.

Good luck

@Jennifer Roussel

Your correct.  The comps should be closed sales if there are closed sales that are appropriate comps.

In addition, the comps should be as similar as possible.  Ideally this means same Bedroom and bathroom count and within a couple hundred feet.

The comps your real estate agent provided seem to be poor and likely warrant getting a different Real Estate agent.

Good luck