should I buy this duplex?

Question

I found a duplex listed for $31thought Each side of the duplex has 3 bedrooms and one and a half bathrooms. From the pictures on the listing the property seems to be well kept although the kitchen could be updated. I drove by the property and the exterior of the building and the rest of the property seems to be well maintained. Rent comps in the area give me a low rent per month estimated at $1200 and on the high and $1400( that's for one side only), maybe more but I'm pretty conservative.

One positive is that the property is close by my home and I intend to manage the property on my own.

I have about $50,000 that I can put towards a down payment. I realize that does not give me 20% down. If I were to offer on this property, I would not offer full price, and im not sure what I would've offered considering I have not seen the property. But let's assume I get it for 290,000 dollars. 20% down would leave me with a 232k mortgage and PITI of about $1430. Assuming I obtain a rent between my low and high estimations($1300 on each side), I would profit just shy of 1200 dollars per month before expenses. assuming the 50 percent rule with regard to those expenses my estimate for profit per month would only be several hundred dollars per month.

Any insight or critique, is very much appreciated. this property is located in the Denver Metro area.

Thank you BP community in advance for your thoughts.

P.S. Please excuse the typos. I dictated this post on my phone!

Bradley Benski · Answer

@Joe Gravelle

What you provide:

Ask Price: $310,000

Offer price: $290,000

Cash at close (20% Down plus 5% Closing costs): $72,500 (OK my estimate)

Rents: $1300 per side or 2600 per month

50% Rule for ballpark analysis NOI: $1300/Mo or $15,600/Yr

Mortgage ($232K) 30 year 5% = $1246/Mo or $14,952/Yr

Net Cash Flow = $54/Mo or $648/Yr

Cap Rate =  5.38% (NOI/Purchase price)

Cash on Cash Rate = 4.33% (Net Cash Flow/Cash at Close)

What you ask:  Should I buy this?

Doesn't look like a good deal to me, but your mileage may vary.  Your Cap Rate and Cash on Cash rate are very low in this deal.  There is more analysis needed, but you'd have to confirm expenses by getting the past 2-3 years of books on the property!  Then you can start to see what it actually costs to keep the place rented, what the rents are etc.

Some quick math trick to get a ballpark offer price:

Cap Rate = NOI/Purchase Price so Purchase Price = NOI/Cap Rate

If I want an 8% cap rate than purchase price = 15600/0.08 = $195,000

If I want a 10% cap rate than Purchase price = $156,000

Or if you want to make $100 per door per month or $200/Mo $2400/Yr it ends up being approximately 6% cap rate on this NOI or $256,137 offer.  Did I mention I love the Goal Seek function of Excel.

Can you get the property for that?  Maybe, maybe no.  Since Duplexes are treated more like Single Family Residences and not specifically commercial properties their values are typically driven more from Housing Market forces instead of Income Production.

Aaron Montague · Answer

This property doesn't pass the 1% rule, so pass.

I like to look at the expenses individually.  Here is my list to get from ~50% to an more exact estimate of the monthly expenses.

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. (8% represents 1 vacant month/unit/year)

Grant P. · Answer

This is why we have been doing value add buy and hold.  We rehab the entire property, and hold it as a rental.  This makes the cap rate very attractive, and the unrealized gains are there as if we flipped it.

Anson Young · Answer

No worries, I realized that after hitting 'post' - rentals are tough on MLS, even multi family.

Anson Young · Answer

Less than zero is pretty pessimistic, we are buying 1-4 a month from MLS.  Granted, these are flips, but still....

Tom Spaeth · Answer

Anson - I concur on the flips. There are still deals to be made off of the MLS there.  Joe was asking about a rental. I am pessimistic about finding good rentals on the MLS. Not to say it can't be done though.

Joe Gravelle · Answer

Thank you, everyone for the replies and for running some numbers. It sounds like I need to keep looking and keep saving.

Tom Spaeth · Answer

Of course not knowing the particular area makes it tough to know what you are really looking at. Cash flow it only one part of the equation. A very big part. However you can also not fail to look at the long term direction of this property. I would never want to bet on speculation in this or any market. You should look at the direction of the area. Will the value have any real chance of moving up or downward.

Denver is an overly competitive market. The chance that you will find a deal, especially on the MLS is less than zero in my opinion.

I just helped someone sell two houses that I would never have bought. One one the side of the highway and one in the worst neighborhood in Denver. Neither property will ever gain much in value. Matter of fact the one in the worst area make great cash flow numbers on paper. Any they purchase price was $50k higher than value from looking at comps.

When either of these properties goes on the market after our market in Denver has normalized the new owners will probably see a net loss on the property.

Bill S. · Answer

Right now that is a reasonable deal in Denver. That said, the location does matter. My guess is that it's a D area (Denver doesn't have any F IMO). That being the case, the low rents seem about right and your high rents would not be supported by that type of area unless it's totally tricked out. I looked at a property, rented section 8, that had a 3 bed at $1,250. I think your rents are optimistic and you will pay with higher vacancy and poorer tenant quality (trashed units) unless you are in a more desirable area.

I think a bigger question for yourself is do you want to deal with the type of tenants that come with this property and this area? Since you plan on self managing, how would you feel about being there at 9:00 pm on a Friday or Sat Night?

This is the bottom line, generally the best cashflow is in the worst neighborhoods for any given City. It doesn't matter where you own. People that only look at cash flow end up with Junk property in the 'Hood.

should I buy this duplex?

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