Is this a good deal?

Question

I have a coworker that is wanting to sell a duplex. It's worth about 65k. She's willing to owner finance to me with 5,000 down at 6% interest for 17.5 years. The PITI for the property would be around 600. The currrent rent for both sides is 450/month. I'm thinking the rent is too low and should be raised to 500/month. This means the gross income would be 1000/month. That goes over the 50% rule. The place is in good shape with no major renovations (that visually need done immediately). Do you think this is a good investment even though it doesn't meet the 50% rule?

To give some background, I'm 33 yrs old. Own two rentals. One is easily meeting the 50% rule and the other is not (it's at about 85%, which is ridiculously high, but it used to be our primary and it's going to be paid off in 6 years. I'm hoping to keep it under control for those 6 years. I hope that's not wishful thinking)

Engelo Rumora · Answer

Agreed.

Also, you can get better numbers rent wise on a $65,000 purchase. Especially considering its a duplex.

Thanks

Mike D'Arrigo · Answer

@Bryan P. you need more information to really know what the numbers are. The 50% rule is a good way to quickly pencil something out on a napkin but to do some real due diligence, you need to know what the taxes are, who pays water and gas/electric, how much that runs, what the real rent is, not what you're thinking it should be. Sometimes that wishful thinking. Be careful not to force fit the numbers to what you want. Off the cuff though, I would say it's not a good deal. The rent to price ratio is only .8%. I wouldn't look at any duplex with less than a 1.5% ratio.

Just my 2 cents.

Good luck

Just my 2 cents.

Good luck

Greg B. · Answer

why 17.5 years? Stretch it to 30 with a balloon somewhere down the road. Get the best deal, terms, cash flow for you not her. Can you really raise the rents and keep the tenants or will they bounce at the increase? If they do leave, are the units in good enough shape to make a quick turn around. Offer her $50k and wait for her counter.

Dean Letfus · Answer

If you're saying it's worth 65K and you are going to pay 65K then it's not a deal even if it had better cashflow. No equity at purchase never a good enough deal.

Bryan H. · Answer

It's too lean of a deal for me with those terms.

I'd consider it if you can put 20% down, get conventional financing at 5.5% and raise rents to $500/unit

Payment would be $295, using 50% rule would leave you $205/mo cash flow or 19% cash on cash return.

Rafael Floresta · Answer

The only advantage there is the low cost to acquire. If you add 100 bucks maintenance for each unit, your profit is very low.

Once a renter moves out and you need to change the carpet and paint, your cashflow is gone.

Is this a good deal?

6 Replies