Help me structure my first offer. No real comps to work with.

[Jonathan Stastny]

Hi everyone!  I am fairly new to real estate investing, but I have been living and breathing it for the past 18 months, taking in all of the information and advice that I possibly can.

I own two rental properties, and am getting my first cash out refi this month!  I have found my first legitimate opportunity other than the duplex I am house hacking and the rental property I inherited.  The property is two blocks away from my current duplex and was for rent, I called the owner and talked to him and he is a retired farmer who owns over 50 rentals, but most of them are closer to his hometown, about an hour and a half away from Omaha, where the property is located.  He is interested in selling it to me, and I even brought up seller financing, because he owns it free and clear and doesn't need the money.

Anyways, the property is identical on both sides, 2 bed/1 bath, however the basements are large and it wouldn't be difficult or expensive to add a good sized bedroom with a large closet and attached bathroom, it would technically be the master. Duplexes rarely sell in my market and the only comps are from 2016, so I am having trouble landing on a number to offer. I have ran the numbers, and at current rents ($820 per side) and current condition, it would cash flow $14/mo at a $160,000 offer. He purchased for $150k in 2012. Zillow has the home value listed at $179k, but I know Zillow isn't great to go off of for valuations. I don't want to insult him with a low-ball offer, because he seems like the only reason he is giving me the opportunity is because he likes me and we connected. Normally, on a property that only cash flows $14/mo, I would not make that offer, however, knowing that I will be able to raise rents $450-500/unit as 3/2's, should I just offer the $160 knowing that the investment makes sense for me in the long run, or do I try and get it cheaper? Not to mention the ARV would be at least $230, as there are hardly any 3/2 duplexes that even exist in our market, and the demand for duplexes.

As it stands now, I would like to offer $160k if I need to get my own financing, or $170k if he will do owner financing.  Even at a $170k purchase price, the property would still cash flow over $600/mo after upgrading the units.

I hope I made sense in all of that...any advice would be greatly appreciated!  I am wanting to make an offer today before he fills the vacant unit.

[Daniel Reyes]

@Jonathan Stastny

Hi Jonathan,

Thank you for posting! Congratulations on continuing your real estate journey.

Residential properties (4 units and below) are only valued using the sales comparison approach. This means typical value appreciation strategies are riskier from an investment perspective, as no matter the investment to the property (capex for example), the property’s value will be somewhat capped by the single family homes around it. As this is a duplex, we might consider the property using square footage, total bedrooms/bathrooms, etc. against other residential properties nearby.

The financing and deal structure of this property will of course greatly affect the narrative of this asset.

Please feel at liberty to contact me if I might assist. I wish you well!

All the best,

Daniel Reyes