Newbie buying a duplex - good deal?

Question

Hello everyone! I'm a newbie to multi-family, I currently own 4 single family homes but this will be a new venture for me. I'm looking to buy a duplex in Lawrence KS and wanted to run it but all those with experience to see if on the surface it looks like a good deal. Here's the details:

Purchase price - $125,000

Down payment - 20% = $25,000

Principal & Interest - $470

Taxes & Insurance - $130

Total monthly payment - $600

Each unit is currently rented at $625 per month. Each unit is 2bd, 1bth with a 1 car garage. Duplex is in good overall condition and does not currently need any work.

Thanks in advance for everyone's help!
Paul~

C Mitchell · Answer

If you can cover your nut by only 1 unit leased.... great deal.

David Beard · Answer

It's difficult to just throw a deal up here and ask for feedback.  Your town of Lawrence is obviously a place that is pricier than most parts of Michigan or where I invest in Ohio, so we have a different perspective.  You have zero 3BR homes on the market at less than $40K in your county.  In SW Ohio, Hamilton County (Cincinnati) has 140, and Montgomery County (Dayton) has over 300.  So sure we can say we bought such-and-such deal with much richer cash flow numbers.

If you want to stay in your local market, which many think is wise, you have to do the best you can.  I'd venture to say that you may have a better renter population there, and your unemployment rate is just 5.2%, so these factors will be very beneficial over time.

But being in a more challenging market (for finding cash flowing deals) means that you need to work all that much harder turning over rocks.  For example, you might want to seriously consider doing some direct marketing to owners of small multi's in your city, especially those that look like they might be poorly managed, or have an absentee owner.

It's going to be challenging getting ahead when paying 100x mthly rents for small multi's at this rent point, that's just a mathematical reality.  But if that's what you have, then that's what you have.  If you can net 7% (doing your own PM) and borrow at 4%, then you'll have an ROI of around 15%, including principal reduction.  And the tax benefit from the depreciation will kick that up by 4 to 7 percentage points depending on your tax bracket. And your NOI *should* expand over time, even as your loan rate stays fixed, so that creates a modest tailwind.  It's workable.  See if you can get the price down another 10-15%, as was suggested.  Good luck.

Harry M. · Answer

I agree with Seth and Kurt. This deal is not a flat out disaster, but it's skinny - about a 5.25% COC return. That is based on 25% down (required for conventional loans on 2-4 unit properties), and about $3K for closing and any other getting up and running costs. So your initial cash investment would be around $34250. If we go with the 50% rule, then 7500 of the 15,000 in gross rents would go to expenses (everything but P&I). Debt service at 4.5% over 30 years, would 475/mo or 5700/year, leaving 1800 in cash flow for a 5.25% COC return. As Raymond mentioned you can boost your returns by self managing. This is what my wife and I do. However, I'd be really hesitant to bake that assumption into the long term plans. To me, the property has to be attractive even with management expenses accounted for, then if we self manage, it's more of a bonus that we use to speed things along.
Personally, I'd pass unless I could get the seller to accept 100 or maybe 105 at the outside.
Best of luck.
-Harry

Kurt K. · Answer

To piggyback on Seth Williams post, I just bought a 6-plex for $125k last month. Not that you can't cash flow a duplex at those numbers, it just that you may be able to find better deals out there.

Seth Williams · Answer

Paul Nagy - while I don't have all the information at my fingertips, my initial reaction is that I've seen better cash flow for this kind of investment. Not that it's necessarily "bad"...  but I'm guessing you can probably do better if you keep looking.

I bought a duplex just like this last year (which generates $650 for one unit, $600 for the other) and I paid $49,000 for it. It cash flows pretty well for the most part, but only because I bought it right. Knowing what I know now - I wouldn't be comfortable paying $125K for that kind of monthly revenue.

Just my 2 cents.

Kurt K. · Answer

Paul if you're having rent increases simply because over time the dollar is worth less then also over time your taxes, insurance, maintenance, repairs will also be more expensive, all prices raise. Also if that means going from say $200 to $400 in profit in 25 years it is not the same. $400 in 25 years does not equal $400 today.

Simply put, it is not wise to buy a property that is marginal saying that rents will rise over time, because prices also will rise over time. If you have the same quality building/tenants, profits will remain about the same. The way you beat this is to add value to the property by improving it and improving the tenants there so you're able to raise rents for the higher quality, or by buying it at discount giving you more room for profit.

Paul Nagy · Answer

@dgellner - Why would I never rely on rent increases? Isn't that a normal and almost functional part of business? Over time (15-20 yr period) rents could not possibly stay the same; it would defy the laws of economics, right!

David Gellner · Answer

Hey Paul Nagy,

It seems like thats a decent deal, especially if you are going to self-manage.

I'd just make sure that you understand that you are not putting $600 in your pocket after you pay P&I. Half of your rent, especially if you are going to be holding for a long period of time, will be directed towards expenses/repairs/maintenance.

Also, other more experienced investors will be able to give you a detailed explanation on why you should never rely on inflation/rent increases.

Paul Nagy · Answer

I also agree that by both covering my monthly nut with 1 unit rented and having a monthly profit of over $600 makes financial sense. Plus, I'm 35 years old and planning on keeping these properties for quite some time (15-25 years?) Therefore, even if the numbers are only so-so financially it's probably safe to assume that in 10 years from now each unit could safely rent for between $800-$950 while the total payment would probably only increase by $75-$100 to account for an increase in taxes and insurance. Therefore, what seems like a good deal today could very well be a GREAT deal tomorrow!

Thoughts..?

Raymond B. · Answer

Paul Nagy,
If you use the 50% rule as a guide, here is an analysis of your possible purchase.

50% rule is:
Rental income divided by 2: $1250 equals $625.
Deduct P & I: $470.
Profit is $155.
Divided by 2, equals profit of $77.50 from each unit.

A lot of people (but not all) try and get $100.+ profit from each unit.

The other $625 is used for Taxes, Insurance, Vacancy, Repairs, Property Management, etc.
If you're going to manage the property yourself, you will save about 14% of your expenses each month.
That puts another $175 in your pocket each month.
Add that to your $155., total is now $330., divided by 2, and you are getting a profit of $165., from each unit.

In my opinion, that is a very nice profit.

Raymond

Newbie buying a duplex - good deal?

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