Analyzing a duplex deal - Am I bonkers?

Question

Hey BP, I could really use some advice on this deal I looked at this week.

Current Situation: Sold my house in Chicago last year, purchased an RV to do some traveling and figure out where I wanted to live. Landed on Knoxville TN. Now I'm looking to start my multifamily rental portfolio here. Still living in my RV as I anxiously wait to find the right multifamily deal and plant some roots here. Multifamily inventory here is very low. I have money sitting on the sidelines that I want to put to work as of yesterday.

Market: Knoxville TN

Type: Duplex

Current Rents: $700/side (both 2/1)

Market Rent: $1100/side

Asking Price: $279000

I looked at this duplex and it checks all of my boxes, so I had my agent put it an offer of $217000 which would give me about $330/mo in cashflow, after expenses and property management, when renting both units at full market rent. (Would have to raise rents from $700 to $1100) (I'm using an FHA loan but could potentially do conventional depending on the deal)

Upon calling the listing agent, my agent found out the seller had already rejected a full price offer because it had too many contingencies. A full price offer would mean the other buyer would simply break even on the property and not cashflow (depending on their down payment), even after raising rents to market rate.

Needless to say, they did not entertain my offer of $217000.

Questions:

1. Am I bonkers for putting in the offer that I did? Should I lower my cashflow expectations and go for appreciation, or stick to my guns? (I'm looking to build a solid track record of buy & hold so I can start raising private capital)

2. Is the seller bonkers for asking what theyre asking for it, given the rent potential? (My thinking here is the only people buying a duplex would be an investor who is looking to make money)

3. Should I plan to self-manage it so I can have more room to cashflow with?

4. Should I scrap my goal of starting with multifamily and try to find a SFH rental as there is more inventory? (I was planning to live in one side of the duplex for the first year so I can get out of my RV)

5. Should I look at bigger multifamily assets and see if they cashflow, then try to find a partner who can help me fund those bigger deals? (I'm pre-approved personally for up to $320k)

I'm sure I'll think of more questions after posting this, but I'd really love to hear your feedback on this situation and my questions above. I'm doing this solo right now, so I don't have a business partner to bounce ideas off of.

Thanks in advance for your time and I look forward to your feedback!

Drew Sygit · Answer

If you're not embarrassed about how low you offer is, then it's either not low enough or you're not a serious investor:)

Paul De Luca · Answer

@Greg LarsonIt's likely that the other buyer was going to be putting more money down. There's other variables like if the buyer is planning on doing rehab or lower insurance/maintenance/utility projections. It's also possible that buyer is not an experienced investor.Also most of the time it's investors buying 2-4 unit properties however occasionally people buy them to live in with family.I think you should keep looking for a 2-4 unit if you want to house hack and move out of your RV.

Bob Willis · Answer

As a follow up to your favorite saying, mine is: I'd rather regret the deal I don't make, rather than the deal I do make.

Crystal Smith · Answer

1. I say stick to your guns, but you may need to modify expectations regarding cashflow.2. Regarding the seller- Have your agent check public records to see how much he owes on the mortgage. If he owes close to the asking price then trying to low ball him isn't going to work. If he's got a lot of equity then you may be able to get away with offering less. If the property has only been on the market for a few days providing a low ball offer is a waste of time. If that's the case monitor the property. If it's not sold in a few weeks, make another offer.3. Build paying a management company into your calculations on potential cash flow. Why? If the numbers still work w/ property management expense in place then it will work if you self manage. The challenge w/ self management in my opinion is that you're creating a job for yourself. If you want to ride around the country in your new RV then assume someone else managing your properties.4. I would not scrap the goal of trying to find a multifamily. I'd say you look for both multi & single family at the same time. 5. Regarding larger multifamilies- Im; tempted to say yes on looking at the larger multifamilies but in this case I say get your teeth cur on the smaller multifamilies and then move up.

Greg Larson · Answer

Thanks for the feedback so far everyone. I will keep looking for a 2-4 unit that works for my numbers. Also, today I went to lunch with an experience flipper in Knoxville who has personal capital available and he offered to JV with me on any deals I can find, so that helps!

Michael K. · Answer

@Greg Larson1) You're not bonkers, you actually ran the numbers and figured out what made sense for you, that's smart. Just know that the seller's personality and personal situation will win out over the numbers every time. If they have a high opinion of the property's value and are in no rush to sell then don't count on any steep discounts. Also, he already had a full-price offer, so maybe he's rejecting your offer for a good reason.2) Would need to know more details to answer this. Are you sure about the market rent? Is there some value add opportunity?3) If you can, yes4) The more units a property has, the more it is treated as an investment, not just a home. 2 units fall in a grey area, it's easier to get low downpayment financing on them, so they attract a lot of people who might have been looking for a single-family home. 5) Yes, or save up until you can afford something bigger, or look into alternative financing, or find something that needs work and is priced near the bottom of the market. Or maybe just wait until new inventory shows up.

Jonathan Klemm · Answer

Hey @Greg Larson - Love that you sold your Chicago house and bought an RV.For a duplex, those numbers don't seem horrible. Assuming your numbers are in line it's unlikely anyone else will come along to pay their asking price. I'd encourage you to keep following up.Also, one of my favorite sayings is "some of the best deals are the ones we pass on" so stick to your numbers!

Paul S. · Answer

1. You're never bonkers for trying to get a good deal. 2. The seller may be a little out of touch, but they hold the cards. I see so many multi-family homes sell at numbers that don't make sense right now, unless you're paying all cash...3. Absolutely. 4. The market will dictate that. If you can't find a deal, you can't find a deal and will have to pivot. 5. Not an awful idea if you are going to live in one of the units.

Greg Larson · Answer

@Crystal Smith thanks so much Crystal, this is really solid advice

Marcus Auerbach · Answer

Going up in price over list does not make sense and is probably not necessary. This type of seller wants an "easy" offer and not having to go through issues, repairs, more negotiations - they just want to close. To confirm this and find out details what the seller is really looking for, that's a quick phone call to the listing agent.FHA is never popular with sellers, but you can do 5% down conventional. The size of the down payment does not matter that much, not having an FHA inspection matters, because that can stall a deal a week before closing over peeling paint..The next on the list is inspection, that's not an easy to waive for most people who don't have a lot of experience, so you should not, because that's dangerous. The work around is to bring someone who knows what to look for. If your big ticket items check out (there are only a hand full) the rest is the usual long list of small stuff the seller is not going to fix anyway. So you need someone with you at the showing who understands construction issues, bring a contractor or a good inspector to the showing. I have been remodeling for almost 15 years and most of our Milwaukee duplexes have the same issues, so after a few hundred of them I know what to look for and the big items don't take much time to check. You just have to understand there will also be a lot of small issues, every house has those..Alternatively you can also limit what you are going to do after inspection, for example only negotiate items that are over $2,000 (that would include HVAC) or over $5,000 (there is not much an inspection can find that costs over 5k..) - bottom line, you have to know what your seller wants.If the sellers is waiting for a cash offer on this type of property, good luck, that's not very realistic for this type of deal.