@Santiago Mejia, Great call on turning to BP to get some advice! I’m an out-of-state Memphis investor. So far you’ve heard from some locals and out-of-state folks. Personally, I’m a numbers guy so I’ll first focus purely on the figures you’ve provided (lets assume that they’re completely accurate and you're fully renting it out). Here is the breakdown: Income and Expenses: Scheduled Rent: $26,400 Vacancy: $2,112 Real Estate Taxes and Insurance: $4,139.04 Repairs/Maintenance: $1,848 Capex: $1,848 Utilities / Lawncare: $0 Advertising: $0 Property Management : $2,376 Debt Service: $11,615 ($209,000 30 year note at 3.75%) Acquisition: Purchase Price: $220k Closing Costs: $8,800 Repairs: $0 Total Acquisition Cost: $228,800k Mortgage Value: $209,000 Cash Invested: $19,800 ARV: $220k Financial Metrics: Net Operating Income: $14,076.96 Cap Rate: 6.4% Cash Flow: $2,461.96 per year, $205.16 per month, $102.58 per unit per month Cash-on-Cash Return: 12.43% Does this match what you’re looking for? Personally, I like to see a cash on cash return greater than 15%, but it does pass most people’s threshold of $100 cash flow per door per month. That was assuming all the numbers are accurate. Here are a few of my thoughts regarding the accuracy of those numbers themselves: • Advertising – I didn’t see you mention an estimate for advertising. Even if you plan to find the tenants yourself (it sounds like you do) it’s a good idea to consider the investment at arm’s length. You’ve already done this by including property management costs and every property manager I know of in Memphis charges an additional amount for placing tenants. A good estimate is half of one month’s rent per tenant placement. In your case this would be $1,100 per year assuming you’re writing one year leases (which is typical). • Maintenance – Your estimate of 7% of rent seems fairly low. I would caution you to use a percentage of the cost to rebuild (or to keep it simple the market value of the property) with the location and age of the building instead. I use 1-3%, 1% if it is in a good (B+ to A) area and built within the last 20 years, then I slide the scale up to 3% as it gets into a bad area and the property ages. The reason for this is that property values are tied much more closely to the cost to rebuild than rent values. I personally don’t let this number drop beneath $1200 per unit per year since I’m a bit conservative (and that’s the typical cost to make the unit rent ready after a tenant leaves – assuming they leave it in fair condition), but if it's turnkey and everything is in perfect condition with all new systems I could be convinced to reduce this number a bit. Most properties in the area you’re describing have some age on them – but they’re in a good area. Without knowing anything about the property other than what you’ve described, I would probably pencil in $1,500 per unit per year (total of $250 per month). • Capex – Your capex estimate of $1,848 also appears to be fairly low. Here is a good article describing the breakdown of Capex and how much to estimate for it (https://www.biggerpockets.com/renewsblog/2015/10/13/real-estate-capex-estimate-capital-expenditures/). Without knowing anything about the property other than what you’ve described, I would probably pencil in $1,800 per unit per year (total of $300 per month). • Property Tax - Clearly, based on your numbers the property is assessed at well below market value. I'd simply caution that the assessed value may change and since flyers are going out now (I just got mine for two other properties in the area) you may want to look to see if the new assessed values are listed for your property online yet and adjust your numbers if anything changed. When doing the calculations remember that multifamily is taxed higher than single family in Shelby County. NOTE: I'm keeping your estimate for my calculations below. Based on these adjustments the financial metrics would update to the following: Net Operating Income: $10,072.96 Cap Rate: 4.58% Cash Flow: -$1,542.04 per year, $-128.50 per month, -$64.25 per unit per month Cash-on-Cash Return: -7.79% So just purely on those numbers I would pass on the investment.

Midtown is one of my favourite areas of Memphis, it's up and coming and close to growth points. Considering you planing to live there, have a loan for 30 years with 5% down at low interest rate and it's over the 1% rule, I think Go for it. All the best.

@Santiago Mejia lots of good advise already in this thread, so I'll try to be selective about what I say. Appreciation and rent increases do not happen on schedule. Do not use "anticipated appreciation and rent increases" to justify getting into a deal. Use today's numbers, nothing more or less, to analyze the deal. Appreciation and rent increases are nice when they happen, but don't count on them. Since you're going to live in the unit, it's not a straight number analysis. As has been discussed above, you don't necessarily want to live in the duplex that gives you the best returns... For a house hack, I would look at it this way: 1. Find a duplex/triplex/fourplex where you want to live. 2. Will the numbers work out to your satisfaction? I.e. Will you pay less than you would if you rented somewhere else; and, will this cash flow when I move out (without a rent increase factor)? Don't stare yourself blind at whether this is a stellar deal from a pure investment standpoint. It's going to be your house and your landlord training facility. See it that way and hopefully your decision will become a little easier. Happy Investing Erik

with a midtown duplex with rents over $1,000 per door you are doing really well. This is one of those areas you kinda have to pay up to get into. Prices have only been going up here. This is certainly a good deal.

@Santiago Mejia I enjoy midtown area when I visited but I wasn't able to get any deals there. From the numbers you posted, it looks like it will be a fine house hack though you will have negative cash flow until you move out. If you can get 3.75%/30yr/no PMI, that's a great deal by itself already. Double check the location since I've heard Memphis is street by street / block by block kind of city, and double check your property tax and see if they will raise it when you move out. Good luck. Henry

@Hadar Orkibi I would say you are more local then some of the locals :)

Well, I could have said it better, but quickly responded. All I am trying to say is out of towners do not know how great Midtown is and great deals on paper are hard to find. If you want a great paper return on a duplex, then you need to buy in lower rent areas, but those returns are rarely achieved. Midtown deals are great. I am all in my 4 plex on Clark around $230,000 and get rents at $750 a piece. Taxes and insurance are almost $6,000 a year. When they become vacant, they rent quick. Actually turning one of the units into a AirBnb which if it goes well, will make for very nice cash flow. I know people doing AirBnB in Midtown and doing well since it is closed to Lebonheur, St. Jude and Downtown. I expect to triple my rents during Memphis in May. As for the TK ripoff, like I always say, a TK transaction is no different then any other real estate transaction (simply speaking from the buy & sell part). A deal with equity in it will have equity because it has deferred maintenance. A good TK property is rehabbed to retail standards with all deferred maintenance items addressed. Just like a homeowner who is selling their house in that condition, they would expect retail value too. It seems like good TK providers get penalized on Bigger Pockets for selling homes in excellent shape with excellent property management. Is the better alternative buying a home with deferred maintenance that is not the best looking house on the block and managed by sub standard PM's whose goals are not aligned with their clients?

I do not know that answer. I bought a 4 plex that was renting for $650 a month. I dropped 12k per unit and got the rents to $750. Don't underestimate the value of being in a high demand rent area.

Updated almost 9 years ago on 03/13/2017. Most recent reply

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Santiago MejiaPoster

Lender
Memphis, TN

Memphis Real Estate Forum

Is this a good deal?

Santiago MejiaPoster

Lender
Memphis, TN

Posted March 08, 2017 20:52

Hey I would like to know if you all could tell me if this is a good deal. I am about to house hack a duplex in Midtown Memphis that cost 220k, it rents for $1,100 per side (separated meters). I will pay 5% down and 4% of the closing cost (that was the deal). The one side is rented and I will live on the other side. It doesn't need any repairs. I want to know if it is a good deal after I move. Here are the numbers: Price $220k Closing $8,800 Tax and insurance $344.92 monthly. This is going to be my first investment. Thank you so much for your time and help.

Memphis, Tennessee

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Alex Craig

Real Estate Professional
Memphis, TN

Alex Craig

Real Estate Professional
Memphis, TN

Replied March 09, 2017 03:20

Don't listen to the out of state individuals. Your in Midtown, assuming 38104. You will not have a problem finding a tenant and you will get great tenants at that. Midtown deals are hard to come by. Solid class A deal.

Alex Craig
901-848-9028

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