First Duplex Decision (Need Opinions)

[Kyle Brown]

Hello,

I am close to purchasing my first duplex in South Jersey and am looking to see if anyone is or has been in the same situation.  It is a 2 unit 1 bedroom 1 bath each.  Unit 1 currently rents for $700/month, Unit 2 currently rents for $725/month.  There are minor repairs and definitely updates I would like to do, but no major issues. 

I will be purchasing this with FHA 3.5% down at about a 4% interest rate. It is listed at $132,900, but I will be making an offer around $107,000. The total monthly mortgage for the property including taxes and homeowners insurance is $1103.04/month. If my offer does get accepted, I will only be getting income from the one Unit 1 $700 for the first year, which will cause me to have a negative cash flow. I will be paying the balance which would be $403/month. Once the second year comes and I can rent out the second unit, I will be cash flow positive with $321.96/month.

I would most likely raise rent to $800 and $850 once all tenant contracts are up, but to be conservative, I used the current numbers.  My question is, is it worth it to suck up the negative cash flow for a year and have to put out the extra money to pay the mortgage for a long term positive cash flow duplex?  

[Arpan Patel]

I don't think the math actually works because there is still maintenance, vacancy, and capex that is missing and I'd still add in some property management fee even if you are to manage it at first. This deal doesn't look like it would work because capex might eat away a lot more then you originally intended especially when it sounds like you are not doing any renovations because it is already rented. I would be cautious about this deal. Doesn't seem like there is much space for things to go wrong. Brandon Turner wrote an interesting article on capex and how to estimate its costs - I think last year. Good Luck!!