First-time post: Deal Analysis

[Sam McCoy]

This is my first post to the BP community (after listening to about 50% of the podcasts).

Quick background: I'm in Yakima, WA. In 2006 I flipped two properties (for a profit!) and in 2007 I bought a duplex as a buy-and-hold. I am not living in either unit. I haven't done a single real estate transaction since! My tenants have been great and I haven't experienced a single vacancy, though I have had some turnover. (Why have I waited so long? I think it's because I'm afraid that there's no way my next deal will go so well. The bar is set too high!)

I now have the opportunity to purchase the duplex next door which shares an irrigation system with mine. (Somehow I feel this means I should own it.) This is a 1970's era duplex, identical to the one I currently own. I believe it would be considered a Class B property. The seller has had cash flow problems in the past and, as a result of those problems, he has done ZERO maintenance in almost all of the 9 years he's owned the building. I estimate that there are $15-$25k in both deferred maintenance and updates that needs to be taken care of.

The seller purchased the property in 2007 for $211k and told me he's willing to sell it to me today for the low, low price of $230k. No thank you. After I pointed out all of the maintenance issues that need to be taken care of, he told me that he would consider selling it "as-is" for $210k.

Running the numbers, it doesn't seem to compete with all the great deals I hear about on the podcasts, but I'd like to at least run it past you all for comments. I'm also curious to know if any weight should be given to the fact that I already own the duplex next door (with that shared irrigation system). Perhaps this is the beginning to acquiring the whole block? :)

Let's assume I'm able to talk him down to a purchase price of $200k. (FWIW, I know that he is unwilling to sell for less than $200k.)

Gross Rents: $1825/mo (doesn't meet the 1% rule)

5% Vacany: $91.25/mo (this is a conservative number for our area)

Insurance: $60/mo

Utilities: $125/mo

10% Maint: $182.50/mo

10% CapEx: $182.50/mo

Property Mgmt: Self

R/E Taxes: $190

NET OPERATING INCOME: $993.75

20% Down Payment: $40k

Closing Costs: $3k (ish?)

30 year amortization: $160k @ 4.25%: $787.10/mo

MONTHLY CASH FLOW: $206.65 (~hundred bucks/door)

ROI/Return on Down Payment: 6.2% (nothing exceptionally impressive)

ROI/Return on Down Payment + Closing Costs: 5.8%

Debt Coverage Ratio: 1.26

Earlier I mentioned that the place has $15-$25k in deferred maintenance. Not all of this would need to be done immediately. Most of this could be spread out over the next couple years. Much of it could be covered by the CapEx set-aside.

Once the property is fixed up, it should be worth $240-250k and this increase in value is not shown in the numbers listed above. I'm not sure how to factor that increase in value for a long-term buy-and-hold property.

While the return in year 1 isn't all that impressive, I realize that over time rents will increase, the mortgage will be paid down and maybe there will even be some appreciation.

So, do I make the deal or keep looking for another property to buy-and-hold?

Thanks, in advance for your analysis and advice.

Sam