Duplex Analysis

[Account Closed]

Need some insight from the tried and true movers and shakers here. Carlton Sheets need not apply.

Side-by-side Duplex built in 2006. Market rent of $650/side. Purchase price of $50,000 and max rehab of $3,000. Bank will do the deal at 15% down and 10 year fixed 6.5%. This puts me out of pocket $7500 + $3000 rehab with a debt service of 482.58/month. Property Tax is $2300/year, insurance shoudl be around $2000 (thanks Katrina).

Using the 2% rule, max purchase price is $65,000 so I'm definitely in the clear there.

Using the 50% rule, monthly operating expense should average $650/month over the long term.

Numbers:

Revenue: $1300
Expense: ( 650)
Net: 650
Debt Service:( 482)
Cashflow 168/month

I'll have official comps from my realtor here shortly, but we're expecting the comps to come in at around $75k.

Cash-on-Cash: $2,016/10,500 = 19.2%

Would you do this deal?

[Scott Hubbard]

1. Max rehab of $3K? There is no such thing, in my opinion, of a $3K rehab in a single family much less a multi-family. When your buying an investment property, your not just replacing broken items, your, in fact, fixing future problems which will mitigate future expenses. In a multi-family, you have double the fixtures, appliances, doors, HVAC, etc.... this means you have double the reason to mitigate future expenses and you will undoubtedly spend much more money than $3K...... or wish you had.

2. Seems to me your much more focused on the 50% rule and CoC which can be a poor metric. The 50% rule is a guideline and, in my opinion, you need to look at mitigating future expenses by addressing those things that are at the end of their useful life. By doing so, you will increase your out of pocket, but decrease your expenses and your vacancies.

3. Using a CoC calculation when you have fixed costs and/or a fixed rate of return. When investing as a principal in an investment property, your expenses and revenues will never be fixed. Therefore, using a CoC calculation is merely another guideline at best. A CoC calculation would be a much better metric if your were the lender loaning to another investor with a fixed APR.

4. I would much rather you utilize a CAP rate and a return on investment (ROI) based on full capitalization and expenses. Since I do not have your full list of expenses, it would be hard for me to put a ROI analysis.

5. You need a benchmark! After you calculate the CAP rate, you can use comparables to make sure your paying a similar rate. With a ROI calculation, you can compare the return against other investment choices like treasuries or bonds, or loaning the money to another investor also know as opportunity costs.

However, based on your initial analysis using the CoC and the rules, it looks like a deal worth looking into in my opinion.

Good Luck!