In-depth Analysis. Please Critique!

[Gabriel Krut]

Hey all,

20 year old Junior in college. Interested in REI and owning rentals. Since I have very little capital and low income, I am planning on partnering with family to buy an out of state duplex. Can you take a look at my numbers below and let me know if these estimates are reasonable? I'm still a ways from buying anything, so this is more of a check if my analysis is headed in the right direction. I try to be as conservative as I can with my estimates (overestimating expenses, underestimating rent, etc).

  I haven't been able to find a lot of in-depth analysis breakdowns, so if anybody has some they'd be willing to share I'd appreciate it! Thanks!

Ex.

1421 Broadway Ave NW Grand Rapids, MI 49504

2 units | 2bd, 1ba each

Listed at 130k. 20% down and a 30yr fixed mortgage at 5.125%

Rent: 1800 (21,600/yr) (900/unit as low estimate from comps and Rentometer etc. Average rent in area is closer to 1100 for 2bd)

---

Mortgage: 566 (6,795/yr) (80% LTV. 5.125% rate)

Property Tax: 185 (2,200/yr) (Found via county records)

Insurance: 83 (1,000/yr) (Another high-ball. Michigan home insurance averages at .63% of property value, so closer to 850)

Maintenance: 216 (2,600/yr) (2% of property value)

Misc: 100 (1,200/yr)

Management 10%: 180 (2,160)

Vacancy 8%: 144 (1,728)

--

Totals:

Income: 1,800 (21,600/yr)

Expenses: -1,474 (17,688/yr)

Cash Flow: 326 (3,912/yr)

  If you waded through all of that: Thank you!! Sorry for the wall of numbers. If you have the time/insight, I would heartily appreciate any feedback, critique, advice, etc. you can provide.

 Best,

   Gabriel

[Jim K.]

@Gabriel Krut

I looked this place up on Zillow. You need to get some of the rest of the story out here.

1. Built 1900.

2. Obviously converted old SFR with what looks like a newer addition with mismatched siding.

3. Heavily weathered roof with clear flashing issues

4. What may or may not be asbestos siding, the mismatched siding on the addition is a bad sign.

5. "Upper tenant has been renting for 44 years."

6. No interior photos whatsoever.

7. Last listed for sale 11/19/2018, listing removed 3/25/2017, price $127,900.

This is usually the part when I start talking about trying to make magical thinking work in D-class by way of a spreadsheet, the perils of investors buying obsolete housing in the Rust Belt purely on the basis of numbers with no construction or renovation knowledge, how difficult it's going to be to get contractors in to bid on jobs for a property like this, how it's quite likely that no third-party property manager worth having would take it on as an investor's single property. But this is you trying to get feedback on analysis, not really looking to buy this property with your money burning a hole in your pocket, so I'll skip most of my usual line.

I'm coming at this as a local investor in western PA with a portfolio largely consisting of SFR acquired below this price level, at about this age. I am a DIY investor and handyman, handling most of my own renovations and repairs as well as monthly management.

Gabriel, I would probably not buy this place if it was in my own target area. It's cheap 1900-era SFR construction with a likely questionable electrical and plumbing conversion, some obvious deferred maintenance problems, and a tenant who's been renting the upstairs unit for, again, 44 years. The size of the units are, at best, 900 ft2 for each 2-bedroom, most likely significantly less for the upstairs, and +/-1800 ft2 total looks somewhat unlikely for a structure like this -- I suspect this county is also including the size of the unfinished basement in their estimate . The current owner already put it up for sale last November and failed to sell it. Maybe s/he got an offer in March that fell through, maybe not. And again, there are no interior shots. That selling strategy smacks of amateur-hour, probably born of some desperation. I doubt this is a long-term viable rental. I really doubt you're going to get this place into any sort of shape without spending a lot of money on renovation. And that tenant upstairs is going to have to be dynamited out if you want to raise the rent.

Getting in there, God knows what you're going to find.

Now, there is one rather good piece of news for this property. Zillow.com lists the market temperature as "Very Hot." That's something worth investigating. Why is the neighborhood moving? If you can identify a reason that's likely to lead the area to significant appreciation over time in this neighborhood, that's a reason to buy.

But I'm not sure that's the case on this one. Take a look at the ratings of the local schools. Pretty bottom of the barrel. And these are two-bedroom apartments in this duplex. You're likely not going to find parents with kids excited about moving to that school system and paying top dollar to stay at your place.

As mentioned, your maintenance figure is unrealistically low for a third-party-managed property. You always need a CapEx allowance, and based on the condition you can see the roof of this property is in and zero interior photos, I would guarantee that the downstairs is going to need significant renovation, and the upstairs is in rough shape with a Section 8 tenant who is waiting to be carted out of there in an ambulance and deposited in a Medicare-funded facility.

Gabriel, this is the kind of place that would be run by an investor like me, a local handyman experienced at working with the local systems and officials who would be able to run this place at minimal cost. There are going to be high maintenance costs and capital expenditures, because that's inevitable with a property of this age. I don't think this is a wise first OOS investment at all. The current average age of housing stock in the USA is 37 years old. Can you look for something significantly younger than this in that area to put your money into?

That's my two cents. Good luck in whatever you decide to do.