Minneapolis suburb duplex; good deal or not?

Question

I have a duplex under contract in a south suburb of Minneapolis. It's a really good area, good school district and high rental demand. Because of the amount I have to put down and the amount of deferred maintenance, it's a bit of a heavy lift for me. Would you do this deal?

Purchase price: $250,000

Taxes: $3,300

Rents: $2,400-$2,600 (current condition or if updates are made)

PM fee: $150/mo.

Insurance: $180/mo. (estimate)

The problem is there's a ton of deferred maintenance. Leaking toilet with ceiling repair needed, another leaking toilet with sub floor repair needed, some new windows needed, new AC needed, a bunch of small electrical work, some roof issues due to ice dams that needs to be fixed, asphalt and garage foundation repair, gutters needed (none). I have asked for these items to be fixed but seller could go with a good backup offer they say they have, which I don't doubt on the property.

My down payment is $65k and it probably needs a solid $10k to start with. In addition to the deferred maintenance, it needs new carpet and painting throughout in both units.

There aren't many comps for this area but nearby suburbs the comps are in the low to mid $300's.

Nate Thompson · Answer

I don't see a maintenance budget of roughly 10% included. You may also need to consider paying water/sewer/garbage utilities unless you plan to split them among your tenants. I would also raise property management to 10% of rent, and possibly vacancy and CapX to 10% as well...this is all worst case scenario. And keep in mind this is for 2 doors and a large down-payment to get these numbers...which would hurt your cash on cash returns.Not the worst deal in the world, but these numbers are closer to what I'd look for if I were putting 0-3% down. That said, I haven't been able to find too many deals that meet all this criteria in the Minneapolis area.

Sawyer Lubke · Answer

@Greg W.I would make sure you are 99% confident in your repair budget. 10K goes very quickly. I probably wouldn't do this deal as it looks like it wouldn't meet my cash on cash return goal. Did you include utilities into your calculation (water/sewer), lawn/snow removel, capX, and repairs into your rental budget? Does this meet your investing goals?Cheers, Sawyer

Greg W. · Answer

@Jerry Padilla The roof isn't currently leaking, that I'm aware of. It just needs to be sealed inside to prevent warm air from escaping to the roof to cause anymore ice dams. The house is habitable but needs a few updates; paint, carpet, minor plumbing, minor electrical, flooring and some patching, etc. I am pre-qualified and we have a 4.625% 30 yr with no origination or lender fees and no appraisal fee. We are putting 25% down.

Jerry Padilla · Answer

@Greg W.If the roof is leaking and there are all these repairs needed to make the house habitable......... I am doubting that the house would even be able to get approved for financing, unfortunately. As far as the mortgage goes, have you been pre-qualified? That will give you a better idea on what purchase price you can go up to and about what your mortgage costs will be.

Greg W. · Answer

@Marc Jolicoeur Your numbers are about right on. 6.5 Cap and 7.45 CoC. Definitely lower than what I would hope for. I've looked at townhomes too in the south metro and have a hard time finding those where the numbers work, at least with what I have as my criteria for them; 1200 sq. ft., 2 car GA, 2BR+loft and HOA fee under $200.

Marc Jolicoeur · Answer

Greg, I agree with the commentators here. When I load these numbers into my calculator, I get about $346 of cashflow BEFORE CapX. Assuming you are spending the $10K to fix stuff immediately (I would), your Cash On Cash return is only about 5.5% before CapX reserves. You may as well park your money in a mutual fund. I am making assumptions here that you are getting a low interest rate at 30 yrs fixed.Your Cap Rate is going to be around 6%. That certainly feels low! You should be able to get 7% - 8% for multifamily properties in good areas.I would not buy unless I could fix all deferred maintenance and raise the rents, or it was a fast appreciating market, or if I wanted to live there. If you raise rents by $100 each unit, you will have 7.8% CoC and cashflow of $493. Which is getting closer.You would be better off to buy two $125,000 townhomes in the south metro. You can still get 9% CoC with these.

Greg W. · Answer

@Nate Thompson These are my numbers. If you think I'm missing something or have estimates wrong, please let me know. I'm figuring around $400/mo. net. Rent $2,400Mort $975RE tax $275PM $150Ins $180CapX $200Vac $200Lawn $302400-1980=$420

Nate Thompson · Answer

I would not do this deal due to the rent to purchase price alone. Don't see how this would cash flow enough - if any at all. That is unless the property was extremely undervalued or I was planning to live in one half of the duplex because I liked the area a lot.

Sawyer Lubke · Answer

@Greg W.Minimum 25% return on capital (I try to find equity plays in rentals to hit this goal), no war zones and I prefer the properties to be 1950's+

Greg W. · Answer

I agree, 10k does go really fast. Utilities (water/sewer) will be paid by tenants. Lawn care will be hired out but snow removal will be tenant's responsibility. Yes, CapX is included. @Sawyer Lubke what are your cash on cash goals and other requirements?