Possible good deal for first rental property?

Question

I was perusing craigslist and found an ad for a duplex for sale near downtown Indianapolis.  The seller is asking $36,000 for a 2 unit, 3bdr/1bth duplex.  Claims no repairs are needed, low maintenance property, and both units currently rented out and cash flowing $1100/month.

So, from the ad it looks great, but I would obviously need to run the numbers.  No address for the property was given and I'm not sure where to begin without at least an address in checking this place out.  Should I contact the seller directly and just ask them all of the questions I have about the property, including property tax and ball park insurance rates?  Any and all responses are appreciated.  Thanks

George P. · Answer

as opposed to what? getting an agent to contact him? obviously he doesn't want to use an agent, that's why it's on CL.

contact him, go see it, talk to him, get the numbers and let's see if it works.

Michael Morgan · Answer

@Jason V.@Tom Ott

Thanks for the input guys!  I understand that REI is not a 'one size fits all' kind of ball game, and I am trying to find what makes the most sense for me now starting out.  The rental market in Indianapolis is pretty decent right now, so i thought it might be a good time to secure a property and add to my portfolio from there.  Plus I am fortunate enough to have several close friends who are contractors to include plumbers, carpenters, and one guy who specifically concentrates on rehabbing kitchens and bathrooms.  I'm also pretty handy my self with basic repairs and maintenance.

Jacob Sampson · Answer

I would guess that you will find some pretty significant negatives as you start digging.  On the face of it those numbers are too good to be true...you know what they say about that.

Jason V. · Answer

@Michael Morgan Hands-off, hassle-free REI usually translates to buying higher end properties, and then paying to have them managed. Price of admission is much higher and the margins are (arguably) much tighter than what we've been discussing.

To do that on the cheap, look into Turn-Key REI. They are companies that go buy those cheap properties, fix them up, rent them out, and then sell them to (usually) out of town investors who will pay that same company to manage the property for them.  Usually those investors are only looking at cashflow and return numbers, and can get burned on the same things you and I could buying these properties...except they pay a lot more to have someone else do all the work.

Chris Clothier at Memphis Invest is about as good as they come, from what I hear. He's been a guest on the BP podcast several times, and if I was going to do turnkey, he's who I would most likely choose to do business with.

http://blog.memphisinvest.com/

There's a thousand ways to invest in real estate - finding out what niche fits you best is important, and will also change over time as you gain more experience. I just try to listen to the folks who are way, way smarter than me, and there are a lot of them :-)

Jason V. · Answer

@Michael Morgan I'm a new guy, but I know my area pretty well, and it sounds similar to the area you're looking to buy.

When I'm looking at cheap, cheap, cheap properties (10k SFRs, 30k Duplexes, 60k Quads) I use: 12% Vacancy, 10% Maintenance, 12% management (which I think is accurate for most markets when considering total cost, personally) $1000/yr for insurance (not really a % of rent) and 10% Cap Ex.

These percentages seem extremely high (and they are) but a big part of that is the rents being so small. So when you have to do a stove/fridge/water heater, it can be an entire month's cashflow (or more.) And a big repair, like a roof or a furnace, can ruin your entire year. Getting the best tenants you possibly can is critical, because having to drop several thousand dollars every time you turn a unit takes all the fun (and profit) out of ownership.

Rents are what the market dictates. In my market these types of houses will be around $650/$700 a month for a 2/1 half house, and there won't be much you can do to get it much higher than that. There's also little to no appreciation, rent pay down or depreciation write-off in these types of properties.

In my opinion, there are deals in this niche, but you will work harder for them. The closer you live to these properties, and the more work you can do yourself, the more money you will make. If you want trouble free, hands-off investing (that actually makes you money) this might not be the direction you want to go.

Jason V. · Answer

@Tom Johnson has a great point. What does Craigslist show you for rents on half houses in that area? Will anybody besides you ever want to buy it?

These types of deals are available around here too, just make sure you're using (much) higher than 'average' percentages for vacancy, maintenance, turnover, etc. when doing your own evaluation of the deal. If you make all of the numbers terrible and it still looks like a good deal, it might be a good deal.

Tom Johnson · Answer

I'd want some verification on the rent there. I was checking out a SFR the other day that was rented out for $600/mth. Yeah, it was rented, but tenant wasn't paying. They paid the first month to get in and that was it. No way that house was going to rent to anyone legit for that price. If they are anxious to sell an $1100 month cashflow for that price that could be why.

Adam Bontrager · Answer

While this property might be a "pig", it's hard to beat $1,100 monthly cash flow on that small an investment.  As Jason pointed out, there are legitimate reasons why many investors choose to stay away from properties like this one.  That being said, it all depends on your strategy.

If you think the property fits with your strategy, definitely contact the "seller" and get all the details.  Find the address and research the neighborhood.  You'll be able to make a much more informed decision at that point about whether you're interested in the property.

Jynell Berkshire · Answer

Michael,

I have lived and worked in the near downtown Indianapolis area for the past 16 years and haven't come across a purchase of a duplex for $36,000 without any repairs. However, if the landlord wants to sell the property, this could be a good deal.

I agree, you most definitely need to research this deal further and go to the property. Schedule a time to go into the property and look at the condition. Ask for any warranty paperwork, when repairs were made, etc. Even research the City of Indianapolis website for code violations and whether there are any liens on the property. You may find that mechanic liens have been recorded in the chain of title against the property.

Who knows, this may be an awesome opportunity.

Happy Investing!

Jason V. · Answer

Depends.

I see Real Estate Investment like losing weight: you have to find what works for you and stick to it, in a healthy way.

Some people are marathon runners, others are power-lifters. Both of those types can be more fit and healthy than someone sitting on the couch eating pork rinds and drinking a case of beer, and both kinds can look healthier while actually be unhealthier.

Sorry Boss - No simple answers.

Possible good deal for first rental property?

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