New and Wanting to Learn w/ Real Deal

[Carlos Ibarra]

Hello BP community!

I'm as new as they get. I heard about BP Christmas day and have blasted through 30+ podcasts and read Rich Dad Poor Dad (as required by RE law). I'd like to learn deal analysis and would like the community's take on this real deal. 

$355,000 duplex. 2 bed, 2 bath in each unit. Currently renting for $1,250 and $950 each.

Total expense are $3,650/yr for water, taxes, ins, etc.

Owned by broker friend who would waive their closing costs. 

There is potential for a minor renovation that could increase rent to maybe $2,600 combined based on comps. 

What are the good, and bad here. How would you analyze this deal and decide to either go through or not? Living in one unit is an option. 

Thank you everyone for this learning opportunity!

[Andres Martin]

You have plenty of ways to analyze the deal. The first three that come to mind (but are most definitely not the only ones) are:

1) Cashflow: 

- Getting cash-flowing properties nowadays is a bit more difficult because of how the rents seem to have flattened and the interest rates that increase your monthly PITI payment being where they are. The more money you pay, the less you make.

- For the most part, there is a good rule called the 1% rule, which all it does is establish that a property's monthly rent must be equal to or no less than 1% of the purchase price. So, if you buy a property for $100K, you would like the rent to be at least $1K (1%). 

- Properties that follow this rule are by no means guaranteed to cashflow positively since many things can affect cashflow negatively, but it does serve as a good starting point to analyze a rental deal super quick to determine if it's worth a deeper look

2) Appreciation:

- Some properties are not cash-flowing but could be appreciated well over the years. For example, the average appreciation rate in the city of Indianapolis by the end of 2023 is believed to be close to 3%. This means that just by owning that property for all of 2023, you increased your estimated net worth by 3%. 

- For example, a property you bought for $100K in January 2023, by December 2023 will be valued at $103K. That $3K difference in valuation is yours when you sell, and the lender has nothing to claim on that appreciation. If that property was cash-flowing negatively at a rate of $200/month, then you can consider that the property generated $1,800/year (3k appreciation - 1.2k negative cash flow).

- Appreciation is one of the biggest ways to generate wealth. However, I recommend only analyzing a property for appreciation if you KNOW you have/make enough money to take care of the PITI payment if the property remains empty. That will probably go against what many others will tell you, and maybe they are right in taking more risks. Still, everyone has their own way of analyzing deals, and I usually tend to be a bit more conservative with my approach when investing myself and when looking for properties for my clients.

3) Flips:

- Flipping a house is usually not an easy feat (don't believe everything you see on TV), but it is also one of the best ways to gain money in real estate. 

- House flipping involves purchasing real estate at a low price, often distressed properties, then improving the property to add value, and finally selling it for a higher price. Flippers typically look for undervalued properties, such as foreclosures or homes in less desirable neighborhoods, and use their skills or resources to renovate them cost-effectively.

- One thing to consider is that you or someone in your team need to be able to accurately determine rehab costs and ARV (after repair value) for the homes you are trying to flip. If any of those are off by just a bit, you could lose a lot of time and money.

Based on the numbers you shared, we can discard cashflow and Flip, and I would only consider that deal for appreciation if you can afford the PITI payment (principal, interest, taxes, and insurance) if the property does not rent.

Alternative ways to minimize your risk would be opting in for a downpayment assistance program(if you are eligible) where they help you with the downpayment and sometimes, depending on the program, you don't have to pay the money back (based on certain conditions) and moving into one side of the duplex (house hacking). This would work for you, especially if you are currently paying rent similar to or higher than what you would get in rent for one or both of the units in the duplex. Again, I cannot stress this enough: ONLY if your current income allows you to still pay for the PITI payment on the loan. I emphasize this to avoid you getting into a deal where something goes wrong with the tenant, and you cannot afford to pay the loan, therefore getting your house foreclosed with all the bad implications that brings for you.

If you want to talk about it, you can always reach out to me via DM, and we can hop on a call at any time to see if I can be of further assistance.