Duplex Deal Analysis & Potential First Deal

[Shawn Davenport]

Hello Everyone,

I am interested in submitting an offer to a seller I spoke to about a week back regarding a property he has for sale. I consider this to be a marginable deal at best, but given the right accepted offer it increases the probability of being a good deal. Maybe I should say decent FIRST deal?

The property is a 1500 SF Duplex. One unit is a 2/1 that rents for $535; the other is a 1/1 that rents for $400. Both units are currently rented and have been for a years. From what I can tell, it typically is rented 100%.

For me as a new investor, the real concern is that the owner is asking for $130k. The house has a tax value that is slightly higher than this number. I know I cannot count on tax values, but comps are hit or miss on this one. The house is nestled between two communities in Charlotte. It literally sits on the “Wrong Side” of the boarder, between a historically not so good neighborhood and an up and coming and popular neighborhood.

The owner is a long term investor (Landlord), and appears to not be so motivated. He mentioned that he is selling because he is getting up in age, and has done well and as a part of his retirement planning is winding down his investments over the next couple of years. (He also mentioned that he purchased his first investment property with owner financing... Inn fact all of his properties were purchased this way)

The owner will finance the purchase with 5k down, but I haven’t gotten the exact terms from him as of this writing. Here is what I am proposing to him in the next day or so. (With the help of this wonderful community)

Here is how I have analyzed the deal thus far. (This is my first income property analysis, so be gentle…LOL)

Asking price- $130,000
Down Payment $5,000 (3.85% I know not much skin in the game)
Required maintenance $0 (I am not naïve enough to believe this, but haven’t gotten any concrete data to refute this claim (By the owner). According to the owner HVAC replaced 2-3 yrs back for both units, and roof is about 4-5 years old. I plan on having an inspection done prior to closing to get the real maintenance needs. Fully aware that this may kill the deal, just kicking numbers around at this point.

Owner finances $125,000 over 30years @ 0%- P&I- 347.22per mo. / $4,166.67Annual debt service “DS”

Revenues:
Monthly Annually
Rental Income $935 $11,220.00 (RI)
Vacancy @ 8% ($74.80) ($897.60)
Net Rental Income
$860.20 $10,322.40 NRI)

Operating Expenses:
Property Tax- 1800 (this is being challenged currently, but no ruling at this time)
Insurance- 1000 (estimate, I will get a quote on this for sure.)
Maintenance- 1200 (Estimate)
Utilities- 800 (Estimate)
Advertising- 100 (Estimate)

Total Operating Expenses (*Very Estimated*) = $4900 (TOE)

Net Operating Income
NRI-TOE= NOI
$10,322.40-$4900= $5422.50 (NOI)

Total Cash Flow
NOI- DS= TCF
$5.422.40-$4,166.67= $1,255.73

Return on Investment
TCF/ TCO= ROI
$1,255.73/ $5,000= .2511 (25.11%)

Cash on Cash (Considering- Down Payment, Upfront Repairs, Closing Costs)
TCF/ TCO (W/repairs and closing costs)
$1,255.73/ $6,500 ($5,000 DP + $0 Initial Repairs + $1,500 Closing Cost) = .1923 (19.23%)

My thoughts regarding this deal:

I think the asking price is a little high for the property considering it’s age, condition (off of visual inspection from the street level only), location, what limited comps I could find.

Although I feel the asking price is too high, I consider this to be the price I pay for the great financing (Which I need). With MY proposed financing my P&I would be less than $350 per month. This is very important to me as far as making this a workable deal given my circumstances.

I am somewhat concerned that the seller may not consider this a good deal and may very well want some interest. This is where I am having a struggle. I need the financing as proposed, for this to be a beneficial deal for me, yet I don’t want to kill the deal with a weak newbie offer to an experienced investor/seller. I was thinking about adding a 15 year balloon to my terms, in order to make the deal more appealing? I realize this increases my risk significantly, banking on paying down enough debt to have good equity built in by year 15, which makes the odds of refinancing higher (theoretically)??

Can some of you give some thoughts on this? What’s the probability of the seller accepting 0% interest for 30 years (I know, I’m dreaming).

How may I tweak the financing terms to make it more attractive to the seller, but still maintain a decent cash flow (I understand that putting more down would help; outside shot at this being an option at this time.)? Would you do this deal if you only had to put $5k into it?

This deal interests me because of the potential for a low DP and possible positive cash flow depending on financing. My goal if my terms are accepted is to extinguish the debt as fast as possible. I am also intrigued by the area, and feel there is a good opportunity for increasing the rental rates. I also am aware that this may require some improvements, which eventually I would like to do anyway. My intent is to rent as is, until the current tenants vacate. At which time I would rehab and raise rents.

Thanks for your time.

[Michael R.]

I would not pay that much for that rent in my area. Also if the owner is not motivated I cant see him holding the note at 0% for 30yrs especially since you said hes getting older. You really are not offering him anything appealing. If he is older he probably would want more cash now or just hold on to it since he will make more than your monthly payment if he just keeps it and rents it out. My experience is with older landlords they prefer to get more cash up front and shorter owner financing terms. The younger distressed landlords give me the best deals as far as owner financing terms. I have gotten young landlord (around 40ish) to give me 15-30 year owner financing with no ballon- I have yet to get that from a long term landlord whos ready to get out of the game.