First-Time Investor Seeking Advice on Purchasing an Old (1930s) Duplex in Texas

[Neal Daftary]

Hello everyone,

I'm a first-time investor and I'm looking at purchasing a duplex in Texas. I'd love to get some feedback and advice from more experienced investors. Here are the details of the property:

- Leased until July 2025: $1400 and $1450 per unit per month
- Built: 1930's
- Zoned O-2

Information in the Rental Report:

- Vacancy rate: 5%
- Purchase Price: $310,000
- Repairs and maintenance: 7%
- CapEx: 5%
- Property tax: $3,600 per year
- Insurance: $2,400 per year
- Roof: Broker mentioned it doesn't need immediate attention but will likely need replacement soon (~$15,000).
- Cash flow: The report shows a $177 monthly cash flow.
- Condition: The house is completely renovated. One HVAC was replaced and second one had fan motor replaced. 

I asked the broker about the electrical and plumbing systems. He mentioned that "some plumbing work" has been done, but he’s unsure about the electrical system.

Questions:
1. What are your thoughts on this deal, given the information above?
2. What additional questions should I ask the seller and the broker, especially for a property built in 1937?
3. What other aspects should I keep in mind and look out for in a property of this age and condition?

Any advice would be greatly appreciated. Thank you!

[Nicholas L.]

@Neal Daftary

at existing rents, with property management, you will probably be significantly negative each month on this one.  a few reactions:

-it doesn't sound like it was actually "completely renovated."  completely renovated would be... completely renovated.  not needing a roof and an HVAC system and maybe some electrical and maybe other things.

-you can't use "5%" for CapEx, especially on an old duplex. this is where new investors get absolutely crushed. Duplexes have two of a lot of things.  So, what's the actual CapEx?  what happens if you need to replace a dishwasher in year 1, another dishwasher in year 2, a washer in year 3, the HVAC in year 3, and the roof in year 4?  that doesn't sound like "5%" to me.

-is it listed on the MLS? how will you finance? do you have a PM lined up? are you close by?

[Gino Barbaro]

@Neal Daftary

What are the comps in the area? With older buildings, we need to be careful with the components of the building, such as roof, driveways, mechanicals.

If you have to change the roof in the next 5 years, there goes any cash flow. And if you try to sell it with an old roof, chances are the buyer will want you to give credit or change it.

Please make sure these numbers, insurance, tax, rents are actuals.

The electrical may have aluminum wiring, which may need to be updated, and some plumbing means none has been done.

The value would be can you increase rents when they come due? Or can you add on any type of additional income?

Good Luck

Gino

[Neal Daftary]

Quote from @Nicholas L.:

@Neal Daftary

at existing rents, with property management, you will probably be significantly negative each month on this one.  a few reactions:

-it doesn't sound like it was actually "completely renovated."  completely renovated would be... completely renovated.  not needing a roof and an HVAC system and maybe some electrical and maybe other things.

-you can't use "5%" for CapEx, especially on an old duplex. this is where new investors get absolutely crushed. Duplexes have two of a lot of things.  So, what's the actual CapEx?  what happens if you need to replace a dishwasher in year 1, another dishwasher in year 2, a washer in year 3, the HVAC in year 3, and the roof in year 4?  that doesn't sound like "5%" to me.

-is it listed on the MLS? how will you finance? do you have a PM lined up? are you close by?

Thank you for the feedback @Nicholas and @Gino. 

@Nicholas, what % do you recommend for CapEx and Repairs and Maintenance, repesectively?
- I will ask the realtor for what all has been replaced during the renovation.
- It is listed on MLS and I will finance with the assumptions with 20% down at 7.5% interest rate.
- I live only an 1.5 hours away and plan to self-manage. 
- Any other input would be greatly appreciated. I am also looking at other properties which are much newer but will require a renovation. 

@Gino
- The comps are in line between $1,400 to $1,600. 
- The driveway and front entry path does need some work. There is 1 parking spot on the property and is being charged $50 a month (a tenant is paying extra for it).
-  I confirmed the tax rate and took the purchase price as the base.
- Any other information would be helpful.

Thank you again. 

[Scott Mac]

It would be wise to order a home inspection from someone who does duplexes.

It would also be wise To order a sewer cam inspection.

It would also be wise to have a reputable roofing contractor who has been in business for several years walk the roof and give you an estimate.

With roofing there is no way to tell how long it will last but you can tell if it's worn out and needs replacement. A roofer can probably give you a guess at best. 

With the roof the other issue you have to consider is blow off. Where the winds strip shingles off of it. That could happen at anytime, and may be an insurance claim if enough come off.

If the home inspection does not address the electrical and plumbing enough you may wish to have an electrician and a plumber come in, for a fee, and have a look at your system.

Or you could just wing it and not do any of these things and hope for the best.

Good Luck!

Collecting the rent 1930's style.

[Nicholas L.]

@Neal Daftary

-I think self-managing a duplex from 1.5 hours away is going to be a huge pain.

-CapEx: don't use a percentage, make an actual budget. Since it's a duplex, it has one of some items (one roof?) and two of others (furnaces, water heaters, appliances, etc.?) Make a schedule based on the actual cost and useful life of each item. That's your CapEx budget. Not some meaningless percentage.

[Alecia Loveless]

@Neal Daftary I live in New England. I’d say 85-90% of the housing in my area is older than 1950. I’ve owned 5-6 properties that were built around 1900. I haven’t had more of a headache with the systems on those properties than my 2-3 younger ones.

Granted we don’t typically have HVACs that require constant maintenance but our furnaces typically have about a 30 year life and cost as much as a HVAC to repair and they do have annual maintenance costs of around $200.

If you can find a good, reliable, trustworthy building inspector they should be able to give you a good idea on most things in the building.

Don’t just rule it out because it’s older. But you might want to make a little bit of a lower offer too. If you have an honest buyer broker/realtor working for you they should be able to help you make an informed decision about the best price to offer on it that makes the numbers work for you.