Duplex in the city, with a view. What would you do?

[Justin Hennig]

I'm thinking about making an offer on a duplex not yet on the market but it should be in the next 2-3 weeks.

This is one of 3 identical adjacent duplexes, all built late 1940s, all situated handsomely on top of a hill across from a popular city park.

It is about 1680 Square feet finished (840 per side), side x side (mirror image), 2 bed, 1 bath duplex with separate everything (Gas/Electric/entries/laundry), a 2 car garage w/ 1 extra off-street space, big back yard, great views of the park, and in a phenomenal location.

The master plan, which I'd love to get your opinion on, is to purchase the property, and immediately renovate the unfinished basement on both sides by adding a bedroom (to code w/ egress of course) and bathroom down there, as well as a finished family room, virtually doubling the square footage...it would actually be around 3100 finished square feet (1550 per side) total when complete. We would also open up the kitchen with a pass-through into the living room (currently closed off). So, the basement expansion would make it a 3 bed/2 bath on BOTH sides, dramatically increasing the rent it would fetch.

Estimated Reno is $35,000-40,000 based on preliminary estimates from 2 different contractors.

We would plan to Buy, improve, and hold the property, and in doing the renovation, would take estimated rents (based on neighborhood rent comps, craigslist, etc) from about $2400 per month (1200 per side) to around $3300 per month (1650 per month, per side), based on prevailing rents in the surrounding neighborhoods.

Estimated cash flow around $1000 per month after assuming 5% vacancy, 3% cap-ex, and 5% repairs. Tenants are accustomed to paying utilities in this area.

We think with the improvements, it would appraise around $325-350k and could possibly refi and cash out somewhat.

We see the biggest downside on the property is the fairly large amount of cash it would eat up...would need about $60k down.

Found a commercial lender willing to take 20% down, but would finance in the repairs, so assuming 240k purchase price, selling pays CC, and 40k repairs, would require 56k down +2800 in closing costs (1 point). 5 year commercial loan at 5.875% w/ 1 point up front. Cash on cash return around 20%.

Looked into conventional but can't finance the construction upgrades, and would need 25% down on non-owner occupy investment property + reno, or about $100k to pull it off. I like using OPM (other people's money) too much to want to tap myself out like that.

After seeing the first 2 go for around $250k (and they are IDENTICAL), pretty certain it will be listed for $250k and will most likely sell around $235-240k)

Sure i'm missing some stuff...what questions do you have?

I feel this would be a very solid investment based on location, condition, ability to upgrade...oh and its only a block from my house (which I'm happy with). Should I tap most of my cash for this project or is there a way to leverage it higher and get more for my money?

What do you think?

thanks! Justin