FINALLY we closed on our first duplex

[Jesse Holmes]

Hi. My name is Jesse M. Holmes, and it's been so long since I've posted here at BP, I thought a reintroduction was necessary.

Maybe some of you remember this fourplex I was trying to buy. As it turns out, my entitlements were miscalculated by our loan officer—most people don't actually go out and try to buy a pricey second home with their VA loan—and the deal fell through. I'll post a few things I learned in that process in another thread.

Five, six, maybe seven months later, we have finally closed on a duplex—our first. We looked at so many properties, and the central motif is poor craftsmanship and corner-cutting. Some of the homes we visited weren't even square! Since we were so new to the process, it came as a shock to us that people could be so careless. Our last trip took us to a development in Waynesville, MO, just outside of Fort Leonard Wood. The builder developing that area seemed to know what he was doing.

The first problem was the size of the units. To this point, only two-bedroom units were built, and the builder didn't plan on dropping the three-bedroom units until later on. We negotiated for a few weeks, and the result was a newly constructed three-bedroom unit for $235,000—well within the limits of our entitlements. The hardest part of the entire process was waiting.

Here are the numbers we used:

Two units at $950 a piece, or $1,900 monthly rents.

We used 40% for expenses instead of 50% based on some research involving posts like this one.

Initially, our interest rate was 3.5%! Our estimated debt service was going to be $1,100. At 40% expenses, this would leave us with $1,140 - $1,100 = $40! That's $20 a door! In a perfect world, I'd only need … thousands of these deals to be free. Still, in all my time in the forums, I do remember this post that says breaking even on your first deal isn't the worst case scenario. Mission accomplished—until our interest rate changed to 4.25%. Now our debt service is roughly $1,300. The new math puts us at $80 a door. $80 in the wrong direction. Whoops!

We closed on this property with $0 out of pocket which may cause some mixed feelings in the group. Thanks to some PM frustrations on our property in NY (the one I can't wait to get rid of), we were grateful to get back $3,000 at closing. We also received a brand new iPad, 4th generation, something we don't need. We should grab another $450 from selling that thing online.

Also, if you're brand new, which means you have about one or two months less experience than I do, one of the things I'd like to reiterate is that numbers are fluid. Home insurance could increase, rents could decrease, the estimated 40% for expenses will increase every few years as the property ages—as will the cash reserves for maintaining the property, and eventually something will have to be done increase the cashflow. Every deal you do will need some form of ongoing evaluation until the property entirely belongs to someone else or burns to the ground! Am I right?

What are your thoughts, opinions, scoldings, corrections, suggestions, and questions?

[Brant Richardson]

I think breaking even on the first deal is something youre supposed to find out in retrospect. It looks like profit on paper but later on you find out that your only breaking even because you missed expenses, failed to consider vacancy etc. I wouldn't want to go into the deal planning to break even. You shouldn't have to make any major repairs for a long time but otherwise I'm curious why you went with brand new construction, that is a much harder thing to make cash flow. You should be able to find a older cash flowing property in MO pretty easily. Right now you are betting on appreciation, which I hope happens for you.

[Brandon Turner]

Hey @Jesse Holmes thanks for sharing your story! Yes, it's not always fun to break even or lose money. That said, you have to live somewhere, and most of the world is out there buying a single family home for $235,000 (or way more) so the fact that you'll have a tenant helping to pay your bills will help. Also, since you'll be managing yourself (right?) that should help.

Besides - you may not make a ton of cash flow - but you bought new, so your maintenance is gonna hopefully be low. PLUS - you get to learn how to be a landlord for free, rather than paying $50k to some guru! :)

So congrats on taking action! Thanks for sharing your story!

[Jesse Holmes]

This is probably small beans, but I just realized that I double dipped with the insurance. The numbers should be closer to $1,140 - $1,193 = $53, still in the wrong direction.

@Brant Richardson Our decision to build new was influenced by the VA guidelines. The minimum amount we could borrow was $144k. This mixed things up a bit. In the months we spent looking, anything that looked like a good deal with some work was either priced too low or wouldn't meet VA requirements without a few thousand on hand for repairs, inspections, etc. On the other hand, there were plenty of duplexes priced in the $250 range whether they had garages, three bedrooms, or a flock of seagulls living in the bathroom. They even sell one side of a duplex here—something I've personally never encountered. Those were some of the factors that led us to new construction.

@Brandon Turner Free landlording lessons! What a deal!

[Douglas Larson]

Kudos for pulling the trigger on something! I hope it works out great for you. It may take some vigilance penny-pinching but you will L-E-A-R-N a lot! ... and you'll be a pro next time around. I only made a true net of 15K on my first deal and it took a year. They got much better from there.

Have fun and Make Your Own Luck!

[Patrick McGowen]

@Jesse Holmes

Brand new to BP and not much more experienced than you so take for what is worth. Love that you pulled the trigger. If you run it for a couple years and decide to walk away only to have been putting in $80/month in and maybe end up with a couple grand from amortization, still worth the price of tuition. Be glad you closed the deal and are in the game. I think the 50% is just a conservative rule of thumb. The two properties I have are 32% and 51%. I have seen some (HOA dues, owner pays utilities etc.) that are way over 50%. Before you close you should have all expenses figured nearly to the dollar. These you can get from the last year's costs or quote from the actual company you will use:

taxes

property management

insurance

hoa dues

water / sewer / electricity (if owner pays)

yard maintenance (if not required in lease)

Repairs and vacancy are harder to get a good number. If you have no other rule of thumb 5% vacancy rate and 5-15% for repairs (depending on how old).

I am right about where you are, so maybe this is advice for myself. Continue to analyze deal after to see where you under/over estimated. Now that you know what you can get, figure out metrics (cap rate, roi, etc.) and set targets (higher than last deal) for analyzing next investment.

Keep it up!

[Patrick McGowen]

p.s., to break even with no money down is ...zero divided by zero.. hmm my calculater says infinity roi, pretty good percentage.

[Charles Rixey]

Jesse, I am also in the waynesville area and recently looked at duplexes using a v a loan. I am confused by your numbers. Are you referring to 235000 for both sides of a unit or just one? For a 3/2 I was seeing price averages of 120-150 per half of a duplex. If you spend 230000, your mortgage with a va loan should be 1350 ish, with taxes and ins. That leaves you with 1900-1350 = 550 before management fees if both are occupied, or 275 per side. I'm just trying to figure out what the whole duplex is worth because the math seems a little off.

-Charles

[Charles Rixey]

Jesse, I am also in the waynesville area and recently looked at duplexes using a v a loan. I am confused by your numbers. Are you referring to 235000 for both sides of a unit or just one? For a 3/2 I was seeing price averages of 120-150 per half of a duplex. If you spend 230000, your mortgage with a va loan should be 1350 ish, with taxes and ins. That leaves you with 1900-1350 = 550 before management
fees if both are occupied, or 275 per side.
I'm just trying to figure out what the whole duplex is worth because the math seems a little off.

If management is 10% and you are building new, you will have plenty of time to set money aside for future repairs.

You shouldn't be -80 per unit, for sure!

-Charles