Duplex deal! Please analyze...

[Dan Simpson]

So there's a duplex in my area for sale for $198,500. The owner wants 10% down and will finance the rest at 4.5% interest amortized over 17 years on a 5 year balloon with a pre-payment penalty if refinanced before the 5 yrs is up.

The total PITI would be 1,450 a month. One side is leased now for $950, 7 months left on the rent. The other side is currently unoccupied. Both units are over 2,400 square feet and are walkout basement style units with 4 bedrooms each. The unoccupied one is the only unit I've seen and it needs new carpet, paint, wallpaper taken down, the usual cosmetics. It'll take $5,000 or so to bring it up to speed. The owner claims that the other side is in better condition, something I'll verify later once he knows I'm a serious buyer. The market rent for these units is over $1,100 a month. If I buy I plan on renting this side out for that amount which would bring the gross income to $2,050 a month. Once the rent can be raised on the other side we're looking at $2,200 a month total gross income.

Tenants pay all expenses except yard work which would run around $50 a month for 8 months per year.

The roof and AC/furnace units in each units are newer.

I have two single family houses that I plan on flipping but I've never been a landlord nor have I analyzed many duplex or multi-family deals, but can you guys tell me your thoughts on this deal?

I'm interested in the deal for the following reasons:

- Duplexes like this one are hard to find in this area and rent out quickly. They rarely come up for sale. Only one similar duplex (walkout with over 2,000 S.F. per unit) in this entire area of 500,000 people was even sold last year.

- The potential cash flow. Right off the bat it's $600 per month before expenses. Once the rent is raised on the other side it goes up to $750 per month. After I am able to refinance it into a 30 yr mortgage after 5 years, the cash flow before expenses could go as high as $1,500 a month, This doesn't even consider future rent increases.

- The terms. He wants only 10% down. Most lenders or even private sellers selling with owner financing would want 20%. And 4.5% is a solid interest rate in today's market

- The potential of me moving into one of the units at a later date to save $$$, especially if I refinance it as an owner-occupant

Thoughts?