First Duplex house hack Should I buy?

Question

Long time lurker but first time posting. I have been looking to house hack in the San Antonio area and think i might have  a good deal but wanted to check with you guys to see if it is.

Asking price 175,000 it has been on the market for 17 days

Duplex both 2 bed 2 bath 1 car garage no hoaSide 1 currently rents for 610Side 2 rents for  750.

Both have been long time tenants side one 19 years and side 2 for 4 years.

Taxes 3172

they both have their own water and utilities

Side 1 has not been renovated in 20 years so i would have to change the carpet

side 2 has been renovated and should have no problem bring in the normal rent.

The current going rent around the area on average is 850 with some renting around 900.

Should i pull the trigger? What else should i be looking for? Maybe i can ask the owner to bring the price down?

I plan on going a Conventional loan with 5% down and will save about 10k in the bank just in-case anything goes wrong. Any help/comments would be greatly appreciated. Victor

Daniel Gipp · Answer

I took a look at that duplex a couple of months ago as well.   There aren't many duplexes hitting the market so I imagine a good number of us have looked and passed on it.

I questioned the ability to raise the rent by as much as the selling agent was touting.  Granted I know that a few blocks can make a major difference, but not too far that from that property the whole street of 3 bed duplexes are renting from $875-$950

That being said, I like the area you are looking at.

Ian R. · Answer

@Victor Ged no worries...glad to help! Would love to hear how things turn out if you do end up buying this property.

Victor Ged · Answer

Ian Rosado thank you for your response. Small world. I have the capital and this would be my first purchase. If i do go forward i am thinking on offering 160 and see where that takes me. I knew the tenants would move out which is fine. I plan on living on one side if this deal works out. I just don't want to be missing anything

Ian R. · Answer

@Victor Ged

I know the property you're considering.  I actually did a drive-by on it a few months ago when it was previously on the market.  I didn't move forward because at the time, I needed my cash for other ventures.  @Rick Pozos is absolutely correct about the 1% rule.  However, I do believe that these 2 units are way under market rent.  This duplex is in a good area with good schools and on a quiet cul-de-sac if I remember correctly.  I concur that you should be able to get approx $900 a month IF the units are in good condition.  That would meet the 1% rule.  However, as Rick mentioned, raising the rent that much will most definitely mean losing your tenant so you would have to be prepared for that expense.  On the plus side, it would give you the opportunity to get into the unit and make any necessary updates.

Also, as @Adam Juodis mentioned, there is no conventional loan that will let you do a 5% down payment.  But if you're a veteran, you can look at a VA loan and if not, you can try an FHA loan at 3.5%.  But you'd still need some reserves to  cover updates and the potential loss of income if the other tenant vacates.  Talk to a lender if you haven't already done so and get pre-approved so you know exactly what your purchasing power is.

FYI - This property has actually been on the market for several months.  It was previously listed, went under contract, then fell out of contract, and now it's back on the market as a new listing (which it really isn't).  Moral of the story...the owner my be a little more open to negotiations.  If you can get him down on the price, and there are no major issues (roof, foundation, etc.), you may have something worth pursuing.

Good luck!

Jeff Brower · Answer

Agree with the responses above. If it doesn't hit the 1% rule, I don't even consider doing further analysis as it is usually a big waste of time.

Rick Pozos · Answer

Quick easy rule of thumb. If rents are not more than 1% of sale price, pass. That is a low hurdle that HAS TO BE THERE. If you think that you will raise rents on a long term tenant, wrong. They will move out. Now you have to come out of pocket $5k, maybe $10k for repairs.

If the price was about 130, maybe. There is potential for rent increase with some rehab.

Adam Juodis · Answer

@Victor Ged I've never heard of a 5% down conventional loan on a multifamily. Unless you're using an FHA that requires 3.5% down, you're going to have to front a lot more money than 5% for a downpayment.

Assuming:

you buy for $175k and rehab costs are a very modest $10k (Loan ammortized at 30 years, 4.5% APR)

Rent is $1360 as you say it is

Property tax as you say it is

8% for Vacancy

8% for Capex

8% for Repairs

Just factoring these things in, you're almost at -$100 cash flow per month. You should always factor in property management fees even if you self manage(You want to pay yourself for your time, right?). You're in texas so you don't have to worry about snow, but who's gonna do the landscaping? Are you sure all utilities are covered?

If I were in your shoes, I would pass on this property.