Spend 6-figures on a Triplex Conversion or No?

Question

I'd appreciate some opinions on this. I have a sfh rancher that has a detached garage with apartment above it that came with a package of 4 houses. I intended on converting the house to a duplex but am reconsidering. Below are what I consider conservative rent #'s, I feel I may be able to get an extra $100/month income via rent and storage units and I also feel the home will appraise enough for me to pull all my cash out but include a worst case scenario of putting 25% of my total investment down. The rehab and operating expenses should be close.

Basically, the #'s reflect me converting the sfh to a duplex (city has approved my plans), splitting the garage into 2 10x20 storage bays, and remodeling the garage apartment. The house is in rough shape and needs everything, roof, plumbing, electrical, 3 HVAC's, etc.

Purchase: $40,000  1737s.f. sfh ranch with 580 s.f. detached garage apt

Remodel: $103,000

Rent: $2100/month  $700 2/2 apt, $700 2/1.5 apt, $600 2/1 $100/month for 2 storage bays

Op. Exp.: $982  includes: 10% mgmt., 5% maintenance, 5% capex (replacing everything), 8.33% vacancy,$60 insurance, $130 Lawncare, $11 Legal/Admin/Acct., $33 pest control, $133 property taxes, $10 Utilities common area light

NOI: $1118

PI: $757   *$143k loan , 4.875 30yr fixed

Cash Flow: $361/ month

Cap Rate: 9.4%

CoC: N/A, cash-out refi

Assuming 25% down, $35,750

$568 PI  *$107,250 loan, 4.875 30yr fixed

Cash Flow: $508/ month

CoC: 18.5%

It's a big remodel, do these #'s validate the headache for you? I could probably sell the property as-is and make $10k, maybe more on it and do nothing. Thanks for reading.

Andre C. · Answer

Ffor me with those numbers.  Take the 10k and move on.

Christopher B. · Answer

Andre C. thank you for the input.

I'm going to have my agent see if they can find any comps for tri's in the area, I purchased a duplex 2 blocks over on a less desirable street a few years ago. It was a foreclosure I remodeled, all-in Cap Rate of 9 while it appraised at $142k which is right under a 7 cap, so an appraisal of $190k isn't unreasonable.

Patrick McGowen · Answer

@Christopher B. You have to consider the cost of tying up 143k until property is stabilized.  Otherwise, it could be good.  Can you do comps to get ARV?  If I follow your math and the property was priced based on cap rate and your local cap rate is say 7%, an appraiser should value this property around 190k, see if you can find any triplex comps to support this.  If that is the case you should be able to finance out all your initial investment and still cashflow $361/mo.  Infinite return baby!