Could this duplex deal work?

Question

So I've been looking at relatively cheap duplexes in Sacramento, CA, and I would like some of your expert opinions on this duplex I looked at today. I know the market here in California is very much inflated at this point, but I thought I could maybe still make something work with FHA financing before I completely give up on California. The seller wants 259,000 for it and one unit is currently renting for 822 (1 bed unit) and the other is projected to rent for 900 (2 bed unit). I figured the operating expenses to be 736 per month, which includes repairs, capital expenditures, maintenance, water and sewer and vacancy. Do you think I can make it work? This is one of the few duplexes that will accept FHA financing. Any input on this is appreciated, Nigel

Michael Bull · Answer

Where is the duplex located? $900 seems to be pretty cheap for a two bedroom up there. You may be able to increase those rents depending on the location. $80 more for an extra bedroom seems undervalued...

Garrett Amundson · Answer

@Nigel Ford I would definitely check out the rental numbers they seem to be under valued for the Sacramento area. Your operating expenses you figured on $736 but what about your mortgage, insurance and also your mortgage insurance payment due to the FHA loan. I figure your house payment a month is probably around $1850 or so. See what you can do about the rent rates and if you live in the 2 bed unit and rent one of the rooms out to house hack this place for the year to fulfill you FHA requirement then it may work out, just double check your numbers.

Theresa Harris · Answer

Don't you have to live in one of the units for the FHA loan?  You need to include the loan payments and property taxes.

Dave Peterson · Answer

An article in the June 5 Sacramento Bee states that according to Zumper, an online rental marketplace, the median rent for a one-bedroom apt in Sacramento is $1210 while a two-bedroom goes for $1450.  Of course you will have to do some research based on your specific neighborhood.

Wes Blackwell · Answer

Hey Nigel, if you're looking out of state, I highly suggest checking out the Phoenix Metro Area of Arizona. It's only one state away, which makes it a 2 hour flight instead of 6 hours to Florida. We have a TON of people moving here from California, and are #4 in the nation for population growth and job growth.

Best of all, we have 40 properties in your price range, not just 3! So your dollar will go a whole lot further too!

Wherever you invest, be sure you know the market and geographic area really well. Don't buy something you wish you hadn't that's hard to get rid of or attract quality tenants. Due diligence is extra important when investing in unfamiliar areas.

Best of luck!

Ali Boone · Answer

Your expenses don't include the mortgage, property tax, or insurance. What are those numbers?

Side note, with residential properties you aren't going to convince anyone to sell you a property at a low-enough price just so that your numbers work. Market value is market value. Residential isn't based off income, commercial is.

Bill Plymouth · Answer

@Nigel Ford I'm not a California guy but I figured I'd throw in my 2 cents.

What kind of condition is this duplex in?  Is it turnkey or does it need work?

If you are considering an FHA/house hacking route, I wind suggest using an FHA(203k) loan as opposed to the more commonly used FHA(203b).

The FHA(203k) is a rehab loan.  It wraps the purchase price and the cost of the rehab into one loan.  Doing this will allow you to buy the property under market, and move in with some built in equity!  This may help you improve some of those numbers.

Keep in mind that you need to use a HUD approved contractor to do the work.  You can't do any yourself.  Make sure you find an agent and a lender who are familiar with the FHA(203k) process.

Now I'm not familiar with the California Market.  If this strategy isn't viable in your market, then disregard.

I hope this helps in some way!  Good luck!

Nigel Ford · Answer

@Wes Blackwell

Wow thank you for the info i should’ve went with you as a Sac agent in the first place. I think im gonna do what most of the multifamily investors in California are doing and go out of state. Seems like it just makes more sense. Ive been looking at Jacksonville, fl and as far as ive seen the prices are about half that of Sac with the same rents coming in if not a little less. Plus the laws are in favor of landlords. I am curious about who’s buying these duplexes that seem so overpriced and what they’re doing with them.

Wes Blackwell · Answer

@Nigel Ford

I took a look at the duplex you're considering in Sacramento. First off, this is really two homes on one lot, not a standard duplex that shares a wall. Still two units, but it brings up my next point...

Second, these look A LOT like manufactured homes. Identical layout, wall-unit for A/C, super boxy cookie-cutter look, originally intended to be sold as a package deal of 5 properties (so it makes sense previous owner would slap down two manufactured homes for extra income), etc.

I would verify that these properties are NOT manufactured homes, as that may totally ruin you financing.

Third, on top of that, even if you could find a lender to give you a loan on a manufactured home, or even if the buildings aren't manufactured homes, the subject property is zoned C2 for commercial. Speaking in general, if the highest and best use of a property is not residential, it typically doesn't qualify for residential lending programs. And FHA is the financing with the most restrictions and requirements.

But you'll need to run this info all by your lender first before you make an offer. Don't want to waste your money on inspections and appraisals just to find out that you can't get the deal funded.

Although, the property was purchased in 2000 with FHA financing, but the laws and regulations have changed immensely since then so it may not be possible now. Once again, verify and ask your lender.

Current listing states they're looking for Cash, Conventional Loan, or "Submit" -- which usually means seller financing or something more creative. They did not check the box for FHA, so they may not accept your offer even if you made it.

There are two other nearby one unit properties for rent, 3120 Howe Avenue asking $795 and 2121 Edison Avenue asking $950. So $900 seems about right for market rent.

When house-hacking a duplex, you're not going to be making cash-flow, especially only with 3.5% down. But the rent from the other unit will allow you to control a more expensive property for less money than it would normally cost you if you didn't have that rental income, like if you purchased a single family house.

That being said, you may be able to achieve the same outcome purchasing a 3/2 single family house for $260k and renting out two of the rooms for $500/each. There are 103 of those on the MLS, compared to only 3 duplexes.

Hope this helps! If I can get any more information for you just let me know. Here to help :-)

Nigel Ford · Answer

The mortgage insurance makes it so i have to make an even lower offer. Taking the mortgage payment into account i figured it would take a max offer of 110,000 to make it work as is. If i assumed i could make the rents total 2100, than an offer of 180,000 would work. The agent didnt want to offer under 210,000. And that was my last option for small multis in California which im kind of happy about, so im looking into south east areas now. Am I being short sighted here?

Could this duplex deal work?

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