Is This A Good RE Investment???

Question

Hello BP!

We are new to investing in multifamily units and need some confirmation on if we're going in the right direction or not. We live in California and are on the last day of our due diligence for a duplex in Atlanta. Our initial projection of rents has been significantly reduced by the reality of what is currently showing on the market. We are planning to rent out the duplex to Section 8 tenants, but Section 8 maximum rents are not guaranteed, so we reduced projected rents down to what is showing on Zillow. The property was very attractive to us because of the potential cash flow, depreciation, and that it is on a large lot that is zoned for R4. We envision renting it out for 2-5 years, then tearing down to build a small subdivision. The lot size is huge at 1.8 acres. The current owner provided his old zone plans that was for 22 units and this was very encouraging for us to see the potential in developing the property.

The duplex needs a lot of work and based on the lowest contractor estimates, we're at about $80K for rehab that will hopefully get us 5 good years of being safe, livable, rentable and cash flowing, but it is a lot of patching/reinforcing and not completely replacing the major issues. The total out of pocket would be about $141K including the down payment, credit from the seller, & rehab. The cash flow is projecting at $1.3K/mo, which is significantly less than our original projection. We're taking a distribution from a rolled over 401K for this deal. We're thinking that the cash flow, plus the depreciation, plus the ability to develop the land with a small subdivision in the near future make this still a good deal. Does this make sense to move forward on? What are we missing, if anything? Any suggestions and comments are welcome. Thank you.

$325K Counter Offer for Purchase Price (seller hasn't agreed to this yet it, is currently at $340K)

6% Seller Contribution (seller hasn't agreed to this yet it, is currently at $8K)

7.25% Rate

20% Down

$80K Rehab

Rents $4.2K/month

Total Monthly Expenses $2.8K

Cash Flow $1.3K

Chris Evans · Answer

These numbers are not something I'd shy away from.Your invested funds - 141kFree cash flow - $15,600/year

Thats a cash on cash return of 11.06%. This is an extremely competitive deal for the Atlanta market right now.

When rates level out you should be able to refi and free up more of that cash flow which will increase your return significantly.

So long as there's no systematic risk with the area I'd be comfortable with that return every day of the week.

Elizabeth Williams · Answer

Thank you Sean! I appreciate your input.

Sean Richards · Answer

I found the listing and it looks like a solid situation if the numbers work and you plan on holding for 5 years. Developers plan on redeveloping Greenbriar Mall and that area should pick up. Good luck and congratulations! I'm local in Atlanta if you need assistance

Josh Bowser · Answer

Hey Elizabeth - 11% coc for a covered land play seems like a good deal in the ATL metro with current market conditions. These numbers actually make sense

Elizabeth Williams · Answer

It’s currently zoned as R-4. The current owner shared his old proposed zoning plans that he had created after he initially bought the property, and it was to convert the land to a small subdivision with 22 units. I think it would need to be converted to a MR-3 zone for that. But I’m new to what’s allowed for the different zones.

Sean Richards · Answer

Is it R-4 or R-5? I'm fairly certain R-5 is two family and R-4 is single family with an ADU/guesthouse.

Melissa Nash · Answer

Win. The math is the math. Are you happy with $1.3k cashflow? the rest doesn't matter, the benefits for buy and hold outweigh the cashflow anyhow. The cashflow is the Cherry on top of: Appreciation, tax benefits, leverage, hedging inflations, etc etc.

Anything that shows positive cashflow, area with some growth, landlord friendly, Jobs in the area and high rental demand is a WIN!! Best of luck!

Ben Firstenberg · Answer

Not sure if you're still in DD or not, but I think the answer here depends a lot on where the property is. I'm not worried so much about the cash flow as I am the 80k rehab.

Given you're renting for $2100 per unit, sounds like it's in a nicer area but just want to be sure.

Can you share what part of town?

Nathan Harden · Answer

Chris just hit the nail on the head. If you are able to have strong ConC returns with a 7.25% rate, then in my opinion, this is a great deal. You are cash flowing day 1, imagine what you will be cash flowing when you refi to a lower rate.

Randall Alan · Answer

@Elizabeth Williams

Disclaimer... I'm not from Georgia... but I would say this is an ok deal, but not a home run.  I personally think the asking price sounds high given the amount of work that is needed.  I would compare other "rent ready" duplexes and see if you think the extra $80,000 to bring it to rent ready is a good deal in comparison.  Realistically you could buy a 2nd duplex with the money you are going to have to put into the one you are considering.  So think that angle through.  If you had 2 duplexes earning slightly less than this one, I imagine the 2 would outweigh this one on profits.

The "OK" part is that you are earning 11% cash on cash based on your numbers.  That's better than the stock market these days for sure.  In addition, consider that when rates come back down to say 5%, you could refinance and increase your cash flow by about $330/month.  Also look at comparable units and see if rents could go higher.  This might help as well.  On the counter-side of things... keep in mind that your property taxes will reset once the property appraiser sees your new purchase price.  So if your seller bought this for $150,000 5 years ago, and you are paying over $300,000... expect your property taxes to come close to doubling within a year or two.  Each county does this differently.  Our county would apply the new sales price the November following the purchase of the property.  This can be a rude awakening if you aren't prepared for it, and may significantly impact your cash flow depending on what the previous tax rate was based on.

It's not fair to compare to properties bought during other times, but just for comparison purposes so you can have a feel for what "great" versus "ok" looks like, I can tell you that many of our properties are in the 20-30% cash on cash region.  They were bought 3-4 years ago.  Obviously the market and economy have gone nuts since then... but I throw it out there to justify my "It's an OK deal" thought.

Hope some of it helps!

Randy

Is This A Good RE Investment???

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