Did I Make the Right Decision/Use the Right Process?

[Paul Sung]

Background. 29. Single no kids. 80k annually. Currently have a mortgage. Good credit.  California Bay Area. I do not have any real estate specific skills, but I work in finance so I'm reasonably comfortable with numbers. I also do not have the cash to do large flips - though I have equity. My goal is to build a small portfolio whereupon I can retire and draft rental income.

I was recently making an offer on a turnkey duplex. The property in question was 1230 sq foot. One unit was rented for $2100, and the other was about to be. Both units are roughly the same. This comes about to $4k which is significantly greater than my expected mortgage payment.

The seller's asking price was about $475,000.

Based on the seller's asking price and 475k/1230. The seller's asking price was about to $380 sqfoot which is high. I sent an offer for $525, and the seller with $565. Ultimately he came down to $525k, whereupon I told seller that I wanted to think about it before offering $500k at which point the deal was dead.

My questions are as follows:

1) I was very conscious of the price point. Yet the cash flow is so high. Is there a mathematical way for me to bridge the difference? In essence, would the high cash flow have offset the higher price?

2) I am very conscious of an economic down turn. How much of a margin should I build in to account for bad things happening? 

3) Should I have accepted the price for $525k? What details am I missing to make a more informed decision?

4) Does the fact that it's a duplex change the calculation of $ sq/ft? Should duplexs be priced at a premium, no premium or negative when compared to a SFH of similar size?

Thanks in advance to my BP family.

[Steve McGovern]

Agree with the above— why’d you offer $525 to begin with, to then have the seller go up,... and you went back down? I think you’d have been better off staying at 525. No big deal, you lost nothing real, just opportunity which is Zero until it’s realized. Live and learn.

I think your thoughts are good, in terms of #2– downturn— no one can say. If you’re living in this duplex, and if you’re expecting to pay some of a mortgage anyway, then that’s one easy way to mitigate the risk. However in terms of predicting “just how low” a downturn can go and making your adjustments now? No way. Just be as low as possible under your debt service. I don’t think we’re in a “$100 per door and you’re good” type of market at this moment.

Keep in mind too that when a downturn hits, it comes in waves. First wave is from the initial cause— let’s say it’s a stock market blip. The second wave is Job loss based on that; then people can’t pay bills; more companies are hit; more layoffs, and somewhere along the line property values drop either as a result of tenants not paying rent, foreclosures in the area, landlords panicking and accepting less money for rent, etc. My point is, a downturn is an unpredictable, multifaceted tempest. Be conservative, but don’t paralyze yourself either.