4% Rule Duplex!! Tons of equity!! No way, right??

[Adam Scheetz]

Greetings All,

I've been crunching these numbers and running different scenarios to exhaustion. As crazy as the margins are, it still seems like a good buy. Lots of work is needed, but the spread leaves tons of room to accomodate unforseen expenses and still cash flow very well in addition to the equity. I'd love to know if anyone else would feel the same were they in my situtation.

Here are the numbers and Data:

• 1918 Duplex
• 6 Bed/2 Baths
• 2,281 sq.ft
• Banks Asking Price: $99,000
• My Offering Price: $75,000
• Estimated Rehab: $50,000
• Estimated Closing Cost: $3,000
• ARV: $220,000 (Conservative Estimate by multiple local agents)
• Estimated Rent (Conservative): $3,000; (Realistically $3200-3700)
• Verified Property Tax: $7,330/ann; $610/mth
• Verified Vacant Policy Insurance: $219/mth
• Verified Occupied Policy Insurance: $260/mth
• Flood Insurance: +$250/mth (Needs Elevation Cert: $350)
• NJ Landlord Fee: <$25/mth
• 20% Down @ 5% Interest: $715/mth
• CAP-X: 5%
• Repairs and Mx: 5%
• Vacancy: 5%
• Property Management: 8%

Okay, now the talking part. This duplex is in a quiet, clean, coastal town. Very low crime rates (No violent crimes), decent schools, people still walk around and ride their bikes. The neighborhood is middle-income/blue collar. No gang activity. No derelict properties.

I'll show you the results based on the banks asking price and the offer price.

Banks Asking price results:

• Net monthly cash flow: $442
• Year 1 Cash ROI: 7.47%
• Year 1 NOI: $13,884
• IRR: 17.52%
• CAP RATE: 15.43%
• 2% Rule: Actually it's the 3.3% rule.

My Offer Price results:

• Net Monthly Cash Flow: $442
• Year 1 Cash ROI: 7.80%
• Year 1 NOI: $13,844
• IRR: 18.6%
• CAP RATE: 18.51%
• 2% Rule: Actually it's the 4% rule.

Okay, when I first started crunching these numbers and seeing all the positive trends, huge returns, and crazy equity, I started saying what you are right now. "No way, there's something wrong, when things seem to good they usually are." So I started double and triple checking things. I called multiple insurance agencies to get accurate quotes. I ran multiple scenarios at different interest rates, lower rents, higher CAP-X, etc, and the spread still kept looking good. So, after talking at length with multiple real estate agents, insurance agents, and a local investor/general contractor who will be performing the rehab. This property has tons of potential i believe. What do you think?

[Marcus Auerbach]

@Adam Scheetz you have mad two base assumptions that I would question. 

Purchase price: Banks usually negotiate only 5% to max 10% from their asking price. I would be surprised if you get an AO for under 90k.

Second: Rehab cost - in my area a full rehab is usually somewhere between $40 and $50 per sqft. Problem with duplex is that you have all the expensive stuff twice - 2 kitchens, 2 bathrooms, 2 HVAC systems. Only one roof. And bedrooms are cheap.

Once you assume that your purchase price is 90k and your rehab is more like 70-100k the numbers start to look more realistic.

You have to assume that several hundred investors have looked at the property, many of them experienced and with deep pockets. That's what they do every day. What do they know that you don't? I would not buy anything that's in a FEMA flood plain, because I expect flood insurnace cost to rise (currently subsidized), which will cause retail value to drop.