Can Someone Look at my Numbers for a Duplex?

Question

This is my first potential deal and I want to make sure that I'm offering the right price, and if its too far off please let me know.

Property Details:

Split-level Duplex- 3 bed/1ba. each side

List Price: 99k

Rent: 600 one side, 675 on the other

Comps: Only one: duplex sold in last year for 55k - 2bed/1ba on each side- good condition

Offer Numbers: This is without seeing inside the property. If the repairs are more than 10k, they will be discounted from the offer price.

Operating Data: Numbers I'm using to come to Cash Flow and NOI, Seller provided utility expenses and Insurance costs.

Note: the CapEx numbers are estimated from a spreadsheet on things that will need to be replaced in the next 5 years, I plan to sell in that time frame to reduce large CapEx expenses. I budget to replace all large ticket items that will be less than 25% of their remaining life in the next 5 years ie. Roof Expectancy: 20 yr. Current Age: 10 + 5 years =15, Therefore, I'm at 75% of it's life. ,

ROI

Note: The last numbers on year 5 is the cash flow+the return on the sale assuming I sell for 65k , but at this point I don't have strong comps.

I plan to run my numbers like this on all my deals, except for the CapEx and holding period ( I may change those depending on the life expectancy of large items). Please comment about any detail you can, I will greatly appreciate it as this is a culmination of a lot of work from studying from BP and books to put these numbers together and is what I will use for my first deal (unless someone corrects me.)

My offer price is less than half of what they are listing, but I feel these numbers show the real value. BTW I use a 12% Cap Rate because I live in a very rural community and most people are trying to get out of the market due to the unstable conditions of a certain university.

Thanks,

Dakota Hicks

Ed Matson · Answer

@Dakota Hicks - A couple of comments on your expenses: 1. Repairs at 6% looks too low.  I use 10% of gross rental income. Also your utilities at $880/month looks more like an annual expense for two units' sewer and water?   I use Cap Rate and ConC return numbers to determine max purchase price. In my CT market, if I can get a true 9 CAP (w/out PM) for B- properties I am happy.  I wish I could get a 12 CAP that wasn't in a war zone

Dakota Hicks · Answer

@Patti Robertson thanks for responding. I have checked the rents and they were a little low. I could have dropped paying for utilities and most likely charge the same rent. The area I'm in is very rural and rent doesn't get much higher than that, except for college rentals that can charge $350 per room. I actually just went to the property yesterday and found that the property is actually split with two bedrooms on each side instead of the three, and one of the units rents for $25 less than advertised. I offered 33k for the place and I'm leaving it at that. They were asking for 100k, but a nicer duplex that rented for more just sold for 55k, and this one needs a new roof.

Ed Matson · Answer

@Dakota Hicks - You increased the PM but did not change the water/sewer to a monthly expense, thus inflating your expenses/reducing your NOI.  I do not factor in PM for my CT properties for reasons very specific to my situation.  As a general rule I think you should use them in your NOI calculations, especially if you think you will ever scale to the point where it is necessary. Also, your holding costs are essentially a reserve for operating expenses.  This should not be subtracted from your offer because over time they are already included in your operating expenses. Closing costs should be capitalized. You are using $10K for repairs.  Why? If the property requires less then you are only making your offer weaker. Have you inspected the property?  My max purchase price requires a 9 CAP also due to my specific situation.  Because of this it is harder for me to acquire properties in CT than others who are satisfied with a lower return.  I am all about cash flow and don't pay any attention to potential for appreciation unless its an active value add purchase where I am doing a substantial rehab. Also, is a 12 CAP appropriate for your market and this class of property?   If so, use.  If I used a 12 CAP my offers would never be accepted.

Patti Robertson · Answer

Have you checked market rents to see if those rents are in line? I can't imagine only getting $600 and $675 for 3 bedroom units. I love purchasing rented units from owners who have rents far below market.  It is an easy fix to get the rents in line.

John Leavelle · Answer

@Dakota Hicks

If you go the Seller Finance route you do not pay PMI.  That is an institutional requirement.  However, you would be more inclined to meet the Sellers price.

You are correct assuming that the lower your Down payment is the better the CoCROI will be.

Yes, PMI goes away once you refinance.

I replace the roof on almost all my BRRRR deals with a metal roof.  Remember I look for distressed properties.  So it’s not an issue for me yet.  I re-inspect each property every year to stay on top of CapEx needs.  So the likely hood of a buyer wanting a major component to be replaced should be rare.

Dakota Hicks · Answer

@John Leavelle Thanks for looking over my numbers, I appreciate as many eyes as I can get looking out for me. The 10% down is for seller financing the owners are willing to do. I have a local lender that told me that they allow a minimum of 15% down, so if I can't get the seller financing I will go that route. Yes, I have to pay the PMI, but I think it will still be a better COC return using the smaller down payment. Also, I haven't really looked into it, but I think that after I refinanced it would drop the PMI from the increase in equity. I like the strategy you use and I believe that will offer me the greatest return in my area.  It allows you to keep more of the money that otherwise would of went to CapEx for a new roof and others. Also, If a roof has 5-10 years left when you sell, I won't have anyone asking me to replace it before the sale.

Thanks again, John.

John Leavelle · Answer

Howdy @Dakota Hicks

What type of financing are you using with the 10% Down payment?  FHA or some type owner financing?  You will be required to pay PMI (for anything less than 20% Down) until you have the property refinanced.  Are you going to live there for one year?  Investment properties usually require 25% Down.

Good job including the appropriate Holding costs.  You do need to account for the Refinance Closing costs/Fees.

I use a similar investment strategy.  I currently only use the BRRRR strategy and target Distressed properties.  I Rehab to like new condition.  I too pay close attention to current components and appliances condition and life expectancy.  Anything not projected to last a minimum of 5 years is replaced/upgraded.  I sell the property around 5 years after the Refinance.  Then 1031 exchange for a larger multi family property.

Although I agree with your calculations to produce the offer price.  I doubt you will get a positive response due to the good condition of the property.

Dakota Hicks · Answer

@Ed Matson Don't worry about the water/sewer. Thanks for the advice and congrats on earning 100 votes.

Ed Matson · Answer

Sorry about the water/sewer. Totally my mistake. Also, I was unaware you were planning on three months’ of rehab and vacancy. Three months is a long time to do 10k of work.

Dakota Hicks · Answer

@Ed Matson can you elaborate on the monthly water expense? I arrived at the annual net operating income by taking the gross income minus vacancy allowance to come to net income then subtracted all of the annual expenses including the annual water bill. If I turned the water into a monthly expense then I would have to convert all of the expenses to a monthly rate and then multiply by 12 to get the annual. Either way, I get the same number for the expenses. I didn't change the PM, I increased the expenses to 10% of the gross income as you suggested to arrive at the new NOI. I included the holding costs because during the rehab I would be incurring those costs without receiving any rent to cover them while the property is vacant. In this case, there would still be tenants, but I want to make sure that is in there for using this spreadsheet for deals that will apply. I also use that number as a reserve because many banks require that to have on hand and as a note to myself of what I need to have on hand in case of a 3-month vacancy. Yes, the 10k is only an estimate, after walking through the property that number will change, and the offer price will move with that number, for better or worse. Lastly, the 12 cap is not based off hard numbers, but I've found that it brings me closest to reaching a COC return of 15% that I require. I feel the offer is low, but the income and expenses don't lie (assuming they check out).

Can Someone Look at my Numbers for a Duplex?

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