Should I buy this property?

Question

I found a duplex forclosure for $19500. Its about 100 yards from a housing project but the area isnt bad( esp compared to other housing projects in the city).One unit is not ready to rent and but both will need some work. From my rent estimate from similar properties closr to it I assume I will get around $550-650 rent. My mortgage @ 30yrs depending on the rate and downpayment will be $80-120. My cap will be over 50% if both units rent. This is my first attempt at buying an investment property , so should I make the move?

Ryan V. · Answer

How old is this building? Are you doing all the work yourself? Did you assume these expenses or call around and get solid numbers? If you are planning on doing the work yourself, then I would price the rehab with contractors anyway. If you haven't done this before and for some reason can't finish the job then you know you can bring in a contractor and still be ok. From what you listed it doesn't seem like the duplex needs a major rehab, but some of the numbers seem low. What flooring are you planning on using? What is the price per sq/ft? I would be overly conservative on rehab analysis. Take the higher number in the range you predict on each expense. Add everything up and throw in at least 10% for the unexpected and then.....double it. The good thing is if your analysis on rent is correct then you have a cushion you can spend on rehab and holding costs (don't forget those, especially if you are doing all the work yourself. it will take longer than you assume), but I would make sure the rent estimate is accurate. Get solid numbers by calling around about rentals within a street or two. In my area online rent estimates are worthless. How did you get your rent estimate? From your current rent estimate of $550 per unit, by the 2% rule of thumb, divide $550 by 2% and you get a value of $27,500 per unit. This value is for a rented unit in good shape. $55k total. You want to buy the property for around 60% of after repaired value. So 60% of $55k is $33k. Deduct cost of rehab and holding costs and you get the highest amount you should offer on the property. Since the current price is $19k you should be able to spend $14k on rehab and holding costs and still be ok. The biggest advice I can give you is to slow down. Do your homework. Run the numbers a hundred times. Go over the property with a fine tooth comb. Do a solid market rent analysis. Proper due diligence separates the burned out landlords, like the one that owned this property, from the ones that love real estate and can't get enough of it and its wealth generating power. There are hundreds of other deals out there, so don't try to make this one work by assuming.....anything.

Joel Owens · Answer

Your repair estimates are LOW. 1,900 sq ft you can about double that cost just for material alone for floor. Painting 100?? I have 20 units 1,200 sq ft interior. Even if I paint myself the apartment would take 2 5 gallon buckets at 60 apiece.That doesn't include drop cloth,rollers,tape,buying ceiling paint etc. If the color you are going over is real dark you will need primer and most likely have to patch some walls and do some sanding before painting. 2 stoves and 1 fridge 500?? Unless your putting really old junkie used stuff in there I don't see that happening. Cheap fridges that are new here in Georgia cost about 400 and the stoves are about 350 each.

Devon Daniels · Answer

I need to replace about 1900sq ft of floors(vinyl wood, $700-$1000), buy 6-10 gas wall heaters(used $500-750), painting in and out(sweat eqiuty$100), 2-4 window a/c units($500-1000), and 2 stoves and 1 fridge( $500). $3-4k in rehab?

Ryan V. · Answer

I have gone through local banks for mortgages under 50k. Most regional or national banks won't touch them. Two of the local banks will do 15 years max and they adjust every 5. No fixed. I agree with others that it will be difficult finding a 30 year fixed. If you post more info on expenses for rehab and post-rehab I could let you know what I think about the deal.

Jon Klaus · Answer

Actually debt service does not affect cap rate but will affect cash flow. Line of credit rates can be higher, but not necessarily so. I have a line of credit at 3.25%. However, don't get stuck on getting the lowest possible rate. I just don't see a bank doing a 30 year 4% mortgage for $14k.

Devon Daniels · Answer

Signature and line of credit loans have high interest rates dont they? I it looks like they all max out at 5yrs .That would mess up my cap rate and I wont be making any money for the loan that period of time. Other than the short term what is the advantage ?

Jon Klaus · Answer

A line of credit or signature loan might work here.

Devon Daniels · Answer

Jon: I have good relationship with some banks and credit unions locally . I assume I will get something affordable and conducive to my business model.

Devon Daniels · Answer

Sanjiv: I'm planning to make an offer Monday. I was going to try them at 14,000 but I'll try even lower. The house you referred me to is in need of an electrical overhaul and some cosmetic work. I thought multi-family units were more appealing to an investor.

Jon Klaus · Answer

Devon, have you found a bank that will do a $20K mortgage for any term? Welcome to BiggerPockets!