Live-In Duplex dilema. Right price or shoot lower?

[Tristyn Brown]

My family and I are moving to a new area and we found a 3b/2ba duplex with a two car garage on each side in Temple, TX. Apparently these are rare but we wanted to start off right with a renter on one side and us in the other. We are with the military and our housing allowance is 1400 a month which would go toward the mortgage to pay it down and do any minimal upgrading to qualify higher rent. The asking price is 189900, with one side already rented out for 950 but the rent for the recently vacant side is up to 1100. I am still waiting to find out if the rent includes utilities or not. We would put about 14000 down to lower the price but it would be with a VA loan. The taxes is about 4600 a year. Comparing recently sold houses in the area, unsure if they are also duplexes or not, this house is at least 20,000 higher than the "Comps". Numbers wise I want to offer at least as low at 175000 but I don't want to lose this duplex. Our timeline for picking a house and moving is getting shorter and I've never seen a duplex for sale in the 2 months of searching. Should I bite the bullet and buy at asking price or take the risk for the potential cash flow reward. When I ran the numbers I started with 180000 as the price, 4.2% interest, 4600 a year taxes, fees out of pocket, 30 years, 2200 (potential rent when we move out in 3 years or less), utilities paid by tenants, I didn't know what to do for insurance so I put our current insurance (rental property and our current renters insurance) 72, with a management coverage of 10% with repairs at 10%, vacancy at 5%, capex at 10% and no future expectations the cash flow came out to be 160 a month and a 14.31% ROI. I know it exceeds the 50% rule. At a 189900 price the cash flow is $115 and 9.75% ROI. Is this still a good choice?

[Dan Krupa]

@Tristyn Brown , great post. A lot to it to discuss. 

1. Comps need to be on other multis not on SFRs. They are no good otherwise. Have an agent do a CMA for you. That will give you a good estimate of what it should sell for at market rate.(that is different from the apprasial price)

2. I don't know the Temple, TX market but almost all of the U.S. is hot and multis are going fast! How long has this been on the market for? If its more than 15 days it's probably overpriced.

3. Curious but why are you putting money down with your VA loan? If you don't need to put money down, don't do it! Time value of money - money available today is worth more than in the future. So save that money and redloy it/invest it elsewhere.

-Say you put that 14k down, your ROI on that 14k will only be 4.6% or whatever the interest rate is on your mortgage. That is better than a bank but I want more like 10% ROI. So the less money in, the better - always use OPM. (Mr. Money has a great blog post talking about why it doesn't make sense to pay off your 30-year note faster on an investment property. It would make sense if your interest rate was 10 to 18% but not 4 or 5%)

4. Is there a reason your capex is 10%? I know on webinars they will use that as a ballpark but truly it depends on the property, age of roof, the age of HVAC, etc... If your roof is 20 years old, furnace is 15 years years old, and your water heater is 7 years old...you need more than 10%. If they are new - you need far less. 

5. If you renovate and pick good tenants I would say you only need $75 per door for repairs, but that is if everything is up to date and installed correctly. 

6. The 50% was a good ball park but I would use a different mechanism for elevulating this deal. I like your ROI but that is only good for year one. To me cashflow is what matters. If you are cash flowing $100 a door, it is a decent deal and I would take it all day long. If it is only $115 total...that is tight in my opinion. Especially considering you aren't sure of the condition of the property, yet.

7. You said you haven't seen a duplex for sale for 2 months. If that is true and it just came on, come in at close to asking price. Start at 185k and see what they say.  

8. Most importantly - purchase with a subject to inspection clause. Get a great home inspector and make sure they give you the age of all the major systems and appliances.  New: appliances, counter tops, flooring, roofs, AC, furance, etc... can kill your budget/numbers. Water heaters, faucets, outlet covers, etc.. That is simply and cheap if you do it yourself. Don't fuss over the small things is my point. 

PM me if you have any other questions and good luck.