Should I or Shouldn’t I?

Question

Well, I have been chasing a duplex for a month now. I have lost out on it twice. The asking price and CMV is right around $280K. It is directly across the street from my first purchase seven years ago. It is the exact same footprint.

Currently, I get $2,350/month from the duplex I own. I picked it up, $100,000, when the market tanked.

I offered $248K for new property, they countered $265K. I didn’t want to go over $250K, but I offered $252. They said no and contact expired on Saturday. Come Sunday night, the realtor said they are now willing to go $256,500. That is a substantial decrease. I know I can rent both sides out for at least $2,000-2,400 total.  Problem is, I needs some cash.

My plan is to sell a half acre lot for $40-45K, I will also sell a home that I owe $98K. It should sell for $260-$300. I only get $1,400/month for that home. It is in an HOA area and I get stupid letters from them quite often.

If I can sell these two properties I may be looking at $300-340K. I would pay off the 98K loan and put the rest toward the principle of duplex.

End result, I would lose two properties from my portfolio, I would owe $40-65K instead of $98K, my monthly rental income would go from $1,400/month to $2,000-2,200/month and I would go from owning six doors to seven doors, two duplexes and three homes.

Will someone talk me out of this or tell me I should be okay?

Thanks!

Kevin Sobilo · Answer

@Shaun Hunt, I suggest you look at your ROI (Return on Investment) or your COC (Cash on Cash) return.

Literally EVERY house will cash-flow if you put enough money down! When people talk about a cash-flowing property, I think they are generally talking about one that is fully leveraged (where you are putting 20-25% down). If you are putting more down on the deal, then your money isn't working very hard for you while its tied up as equity in the property.

You're numbers are probably correct, but you might not be getting your money to work as hard as it could for you. I think to be financially free we all need some hard workin money so we don't have to work for wages anymore! lol

Keith Weigand · Answer

@Shaun Hunt To me it's not about the # of doors as much as it is my bottom line. If the numbers work so that you have more cash flow for fewer doors, it's a good sign. Everyone has different opinions and goals but mine would be as long as the other key numbers work for your long term plans, go for it! We're not going to get the same deals today that we got in 2009-2010.

Shaun Hunt · Answer

Almost all of this will be OPM, other people's money,  the 25% down will be from HELOC.  It has to be 25% because it's a duplex.

Shaun Hunt · Answer

@Kevin Sobilo and @Jay Helms

First of all, thanks for your help and questions.  This is indeed helping me to make a wise choice.  I am suppose to sign their counter offer today.  Also, Jay, I appreciate your podcasts and your effort to help guys like me out.

This is what I am thinking. I have heard in previous podcasts that as long as it cash flows at least $1, that is a start.  If it were negative cash flow from the beginning, we have been advised to stay away.

What I'm thinking on this deal is to "trade three greens for one red" if you know what I mean.  Here is what I'm willing to trade to make this deal work and again, I probably rambled on too much in the beginning.

I will sell a half acre lot for 40-45K that I own outright. I will also sell a home that I owe just under 100K.  CMV for that home is close to 300K, but just for numbers sake $260-300K.  I only get $1,400/month on that home.

In general, here is how I have the numbers.  I do understand there are additional variables, but I will give a snapshot.

Purchase subject home for 257K, rehab 15K, loan costs 10K, Owe 275K

Sell half acre lot and house and make 300-345K, then pay off current 100K house, have 200-245K remaining.

Take 200K that remains and pay down new 275K loan, Owe 75K, or less depending on sale of two properties.  We'll go with 75K

Hypothetical results

Used to have a home that received $1,400 in rent and a 100K loan. Monthly payment was $700, Cash flow about $700.

Now I have a duplex, Monthly rent is $2000-2400 a month and a loan of 75K and a monthly payment of $600 if I refinance or about $1,600 if I keep original loan.  Cash flow $1,400-$1,800/month depending on monthly mortgage and terms.

To me, it makes sense to go forward. However, those that read this have forgotten more than I know, at the moment.  My plan would be to hold on to this property forever.  If I can come out of this mess owing only 75K, or less, and have the duplex that brings in $2,00-2,400/month instead of my current situation of $1,400/month owing $100K, then that is better.

Again, thanks for the comments, constructive criticism and all of your help.  This is not my profession.  What I have learned has been through BP and reading a few books.  I'm not supposed to have accomplished what I have accomplished over the past seven years.  In the words of Gary Keller, Anyone can do it, not everyone will.

Jay Helms · Answer

Great response @Shaun Hunt, thanks for the clarity. The only problem I have now is your quote “it will cash flow but not by much.” This indicates you don’t have nor practicing strict investing criteria. Dangerous. Find your minimum criteria, set them and don’t go outside of them. Takes the emotional, late night, plea for help post to the forums.

Kevin Sobilo · Answer

@Shaun Hunt, Since this duplex would barely cash-flow for you, why do you find it attractive? Are you counting on appreciation? How do you think this works towards your goal of being financially free of your W-2 job?

Shaun Hunt · Answer

@Jay Helms All over the place, the story of my life. :). Long term vision is to retire from my W2 job in 8-10 years without owing more than a half million while owning at least ten properties.

I was mostly trying to give enough info to allow constructive response. I must have been sleep typing.

In my head, the numbers look ok.

Recap

Buy a duplex for $256,500 instead of $280,000. Less than a 10% discount.

I would have to pay the 25% down with remaining HELOC balance. 7.5% APR

I would have to borrow remaining at 5.5%

My calculations say I will cash flow, not by much, but it is still a positive cash flow.  Too tight for me, this I would sell the other two properties previously mentioned. That would pay off HELOC and drop the other loan amount to a very doable amount.

Jay Helms · Answer

@Shaun Hunt - you are all over the place man. What is your long term vision?

Should I or Shouldn’t I?

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