Contemplating Duplex Purchase

[Patrick Slagle]

Background:

I live in Richmond Virginia, and looking to purchase my first property, a duplex in an up and coming neighborhood. The plan is to do a classic live in flip, BRRR, and then move on to the next property. The numbers looked good, I put an offer down (before COVID-19), and in the final stages of escrow. Now the main question is, do I continue through? Or wait until the market bottoms to get a better deal?

Details:

- Current purchase price: 255k

- Duplex is in fair/decent shape. Houses fully rehabbed on that street were selling for roughly 370k

- 3.5% FHA loan

- Seller credits: 15k (5k will be to cancel out closing credits, 10 to rehab)

- Expected rent per unit: 1200 (pre COVID-19)

- Expected cash flow: $450/month (pre COVID-19)

- Expecting putting in another 10k into the property

- I'm in a financially good position at a decent job

Pros of buying:

- Duplex is on a great street mostly turned over surrounded by a neighborhood that's growing. 

- Its a duplex which is hard to find in Richmond. Especially where I'm looking

- even if the rent goes down 20%, I'll still cash flow. 

- got a great FHA rate. Bought the bottom. More important than the rate, this is allowing me to cancel out more closing costs

- Start gaining experience in rehabbing and real estate

- its a long term investment, even if the market dips, it'll still be profitable. 

- if the market dips, I could buy again in 6-12 months. This is probably when you'd see the bottom for real estate anyways.

Cons

- could get a better entry by waiting

- probably will get a worse renter, and not as much rent as expected

- The effects of COVID-19 are uncertain. No one knows how bad this will get.

- Probably can't BRRR for a while

[Eddie Gonnella]

@Patrick Slagle Congrats on making it this far man! I actually completed a very similar concept recently in the same area. Here's what I wrote about it: https://www.biggerpockets.com/forums/522/topics/728908-middle-of-a-live-in-brrrr-richmond-virginia?page=1#p4716983

When you combine a bunch of the strategies together it can really supercharge your first couple investments, but admittedly it is a major difficulty to literally live through the rehab for example, so that's the trade-off. 

If you are certain of your job security, you are right that this will work out in the long-term.

How confident are you in your ARVs, rents, rehabs and cashflows? I ask because in my experience there are not many places in Richmond where you can buy a place for $255 that only needs $20k in rehab and would ARV at $370k. Also, I don't know many places that would cashflow $450/month with $2,400 in income on a $255k purchase price. What are you factoring into your cash flow? Does that account for property management, capex, maintenance, vacancy, etc?

Also, can you get out of your contract without losing your deposit at this point? Do you have a stable housing situation if you don't buy this?

How long would you be willing to live in this property as your personal residence should things get pretty choppy for an extended period of time? Are you staying in the area for the longer term?

Eddie