Will you help Analyze a deal for me?

Question

We are looking at a duplex in an up and coming area in SLC, UT that is near a great park, close to downtown, and starting to see a lot of restaurants and stores coming into the area. We own another duplex in the area that has done very well but bought it 7 years ago.

Sale Price: 426K

Beds/Baths: 4 beds 2 bath on one side/ 3 beds & 1 bath on other side which can be upgraded to 4b/2bath.

Closing costs: $8749 on

Mortgage: 4.5 % 30 year mortgage with 25% down

Repairs & Rehab costs: 30-50K to add AC units, new furnace, new electrical panels both sides. Up date one side by adding additional bed and bath (the other has already had this done and is in excellent condition)

ARV: 475-500K

Monthly income: $3200

Monthly expenses: $2283 (mortgage, fixed and variable expenses, future assumptions) see below

-monthly P & I: $1622

- fixed expenses: $340/month (water/sewer, insurance, property taxes)

- variable expenses: 2% vacancy ($64/month) , 5% repairs & maintenance ($160/month), cap exp 3% (96$/month): No property management since we do this ourselves for our rentals.

- future assumptions: 2% annual income growth, 5% PV growth, 2% expenses growth, 6% sale expenses

Bigger pockets tool sheet with above data:

Cash flow: $916/month

Cash on Cash ROI: 6.65%-7.57% depending on rehab costs

Purchase cap rate: 7.15%

I know this does not meet the 2% or 50% rule but it seems like a good investment for the area. Would love any thoughts on this property from other investors.

Will Gaston · Answer

@Monte Blunk Are you managing this property yourself? And are you renting this to college students?

Monte Blunk · Answer

Thanks Sarah Lorenz - I definitely agree with you. We ended up buying a duplex that we felt fit our criteria and hoped to rent out one of the sides for $1775 and it got bid up to $2000/month and they moved in 4 days after we closed. So if we can rent the other side out for around the same once we rehab it, we will fit the 1% rule and is in a great location for the long term.

Sarah Lorenz · Answer

I also live in university town with a very strong rental market, and I know that many landlords with zero vacancy because they know their market well and how to manage it properly. If you already have experience and in-depth market knowledge, I think you should use the vacancy and PM rates that you know are realistic. If you have expertise in construction, you might want to analyze your CapEx more carefully with one of the worksheets I've seen posted on BP, over a timeframe of say, 20 years, after your initial renovation.

Monte Blunk · Answer

Yes the duplex is in the sugarhouse area. It's the area that we live in so we know it well and agree the prices are getting crazy. Our other rental is in the same area and does really well but we bought it in 2010. I agree with you and have found another property that is not a slam dunk but we think it fits our goals and needs and hopefully all works out in the end. I know all the big investors and pros are only looking for the slam dunks but for us little investors we are just trying to look for deals that make sense to us and we'll work to make it work!

Brett Burt · Answer

Hi Monte, is this near sugarhouse then? I have one south of you (and west). I gotta say, prices in the valley make me want to sell more than buy. With 3% COC, you could buy a dividend aristocrat and make more with less headache. It's frustrating, i know.

Monte Blunk · Answer

Ok- so it I changed the #s and ran it at a 8% (instead of 2%) vacancy rate, 10% cap exp rate (instead of 5%) , and 8% for a PM The cash flow = $363/month (much lower than $916)Cash on Cash ROI - 3.03% (much lower than the 7%)Pro Forma Cap Rate= 7.85%Purchase Cap Rate= 5.61%1. We do have another duplex in the same area that the vacancy rate is around 2% because the area has 2 universities, multiple parks and is close to down town. So I think 8% is high for vacancy but want to run the numbers very conservatively. 2. Cap exp rate- the rental just had a new roof put on this year, we plan to upgrade and put new HVACs in each unit, and are planning on upgrading both electrical panels and upgrade the 2nd unit to match the other side. So most of the big expenses hopefully won't be for a many years but at a 10% cap exp rate I think we are pretty safe. 3.. We only own a few rentals and always try to do our due diligence with finding good tenants. We put in the PM % but in reality we plan on doing this ourselves since we live in the area and I work in construction and have a lot of experience with dealing with issues that come up. 4. I tried to be really conservative with the ARV and the comps are all over the place for multi-units in our area. Most duplexes are only 1 or 2 bedrooms on each side and are going for around 350K-650K depending on the units. This will be a 4bed/2bath on each side so likely the ARV will be much higher than 475-500 but I didn't want to count on a high ARV. The comps I used were all multiunit (mostly 2-3 units) homes. 5. We are looking more at buy and hold. But would like to get some of our cash back out of the property at some point to be able to buy additional properties. Any thoughts on this?Any thoughts would be helpful.

Gabriel Amedee · Answer

@Monte Blunk Being from Miami, these numbers don't look too shabby but it really comes down to knowing your area and knowing that this is the deal of the month, year or however often you purchase a deal. I'd wait till someone who in invests in SLC chimes in. Just to play Devil's Advocate, are you confident in vacancy being that low? Capex?Is your rent estimate comparing to SFH 4/2's or other MFR? I will say that the fact that hiring a PM would murder your numbers does make me a bit uncomfortable. I always like to plug those in just to have a safety net. I know some people feel strong about never needing a PM but I also know people who used to feel that way as well. Just my $0.02

Monte Blunk · Answer

thanks 1. I'll rerun with the percentages you both mentioned. 2. I don't like having that much cash held up in the duplex and could try to refinance it to get it back out once the rehab was done but haven't done that before so I didn't want to count on having that happen. Any thoughts on other ways to get our $ back out?

Shawn Ackerman · Answer

@Monte Blunk If I was a buyer looking at this deal, I'll probably be hung up on your cap ex/ vacancy numbers. Also have you taken a long look at the comps? The cap rate after $30K in repairs is in the 2% range. COCR at about 7.5%.(Assuming $30K in repairs) If your comfortable with those numbers after shelling out $145K then it should work for you. $145K is decent amount of capital to have sitting into a property only yielding 7.5% but to each his/her own.

Christopher Phillips · Answer

@Monte BlunkSome of your %s are too low.Vacancy at $64 (2%) per month is $768. That's less than one month's rent of $1,600 Should be around 8%. At a minimum, normal turn over you'll have missed weeks as people move in and out between leases. Scorched earth would be both tenants leave at the same time.Cap Ex should be around 10%. At some point, you'll have to replace roofs/water heaters/ furnace/ AC coil/ upgrade kitchen and baths and the rental income needs to be able to support it.Property analysis should include PM. Even if you do it yourself, you still should "pay" yourself, or else you are essentially saying you're willing to work for free. And when your portfolio gets big enough, you'll need a PM and the income needs to be able to support it.