Los Angeles Duplex - Trying to Make the Numbers Work

[Matt Kautz]

Just getting started looking at investment properties in the very competitive Los Angeles area and found a duplex today with a highly motivated seller who needs to unload quickly.  It's a great area, units will be delivered vacant, and with some work unit rents can be increased significantly to market rates.  So, in theory it seems like it should be a great opportunity since there's plenty of room for negotiation on purchase price.

 Since this is my first property analyzed, I'm working for the first time with my cost assumptions worksheet, and no matter how much lower I go on price and higher on rent, I just can't make the numbers work.  In all likelihood it's not that great a deal (nobody hits a homer their first time at bat), but I'd love your opinion on my calculations to be sure I'm not over- or under- estimating anything.  

Screenshot below of the cash flow calculations I'm making... left side is what the offering price is, right side is with aggressive assumptions on increased rent/lowered purchase price.  As you can see, even if the purchase price were 17% lower and rents were 45% higher, cash flow is only breakeven. 

Feedback welcomed/appreciated.  Thank you!!!

[Christian Mkpado]

@Matt Kautz

Could you give more information on the location of the property such as a street name or zip code? That would help in determining the quality of the deal.

Given my knowledge of Los Angeles and the areas that would command ~$1M for a duplex, your baseline rents seem on the lower end, especially if you are going to put in ~$25K in to each unit. In my opinion this indicates 2 possibilities: 

1. The purchase price is too high, and this is not a good deal. Could post your spreadsheet of sale comps in the area? This would help in determine if the purchase price the seller is asking is reasonable? Is the property off market or is it listed on the MLS? If this is an off market deal, make sure that you are shaving at least 6% off what you think the property would be worth on the open market as this is what the seller would have to pay a RE agent if they did list. Also, seeing as you said the seller needs to unload quickly make sure you shave off a few more percentage points given you are willing to move quickly.
2. Your rent comps are too low. Could you please post what you are using as rental comps? Could you also post the Sq. Ft. of the units? Your aggressive rents seem more in line with what I would expect to get for a ~$1M duplex in a nice area of Los Angeles. 

A final parting thought: There are areas in Los Angeles where it is almost impossible to cash flow given the strength of the market and the amount of buyers who are buying purely on appreciation potential and don't care about cash flow. If this is one of those areas, you might consider flipping this deal. That being said, if this is in a great area and if you can get the numbers to break-even, I would much rather hold a break-even piece of RE in a great part of Los Angeles, CA than a cash flowing property somewhere else in the country. In the long run, strong markets (e.g. Los Angeles, San Francisco, New York) have outperformed the greater United States when you account for cash flow and appreciation combined. A word of caution: Do not purchase the property if you will need to dump cash into it every month, this will hamper your ability to scale your investing going forward. If you can answer the few questions that I posed above, I may be able to give additional thoughts. 

Best,

Christian M.