Deal Analysis, NW Ohio Duplex Rental-Units Occupied

[Sarah Donatelli]

Hello All,

I’m hoping to get some advice on deal analysis for my very first (!!!) potential rental property.

The property is a duplex 2/1 (first floor), 1/1 (2nd floor). Completely updated inside/out with new mechanicals approximately 7-8 years ago. Updates include: roof, windows, kitchen, bath, furnace, water heater. Appliances (stove, microwave, fridge, washer/dryer) are supplied with upstairs unit. Tenants are responsible for supplying downstairs appliances. Lot size is approximately 100’ x 75’, front and back yard unfenced, no driveway or garage, street parking. Both units are currently occupied. Tenants pay all utilities except water.

The eventual possible upgrades that I thought of to increase property value are: addition of garage, driveway, fence, and central air. Additionally, the broker suggests that the rent in the downstairs unit could be increased by $50-100/month if the current tenants leave.

The property is in a decent neighborhood, but is adjacent to a bad neighborhood. (I’m unfamiliar with “alphabetical” neighborhood categorizations.) I will be getting comps later today.

This property is located in Ohio, and I live in Indianapolis. However, my sister (who brought me this deal) is a realtor and her broker is currently managing the property for 10% of the monthly rental fee. I would likely keep this PM.

The asking price is $24,900, combined rental income for both units is $790.00, fixed expenses are $107 monthly, other expenses are $364 monthly (mowing, repairs/maintenance, water). The realtor analysis projected “repairs/maintenance” in the “other expenses” category at $157/month based on $500/yr from actual maintenance for the past 2 years, but I thought this was really low, so I multiplied it by 4. Is that reasonable? For a 5 year conventional mortgage with 20% down, I calculated approximately $415/mo. for the mortgage payment.

My calculation of the monthly free cash flow after expenses is:

($790 x 0.083 vacancy rate) - $415 mortgage @ 5 yr - $471 expenses = -$161.00/mo

Broker calculation of the monthly free cash flow after expenses is:

($790 x 0.05 vacancy rate) - $138 mortgage @ 15 yr - $264 expenses = $350.00/mo

My number is obviously very different than the analysis I received from the broker, mainly because I used a 5 vs. 15 year loan period, increased the “Other Expenses” by 4-fold, and increased the vacancy rate from 5% to 8.3%. By my calculation, this is not a good deal.

My questions for this property are…am I being too stringent with the expenses/vacancy rate? I could potentially do a cash deal; would that be significantly better?

Any help would be greatly appreciated!

Thanks so much in advance!