Duplex Purchase - should I pull the plug on the deal?

[Pam R.]

We've been looking for another duplex for a year, and haven't found one that works for us. We finally found one, are in contract, and received some new info today that has me ready to pull the plug. Would like some advice.

Location: Delaware, OH (north of Columbus - lots of commuters to the big city for work). As far as apartments go, nearly everything is a complex - limited availability of duplexes around the city. Between 2000-2012, the population grew by 43%.

Purchase price: 129,000

Rent: 675 + 650 (1325/month)

Down payment: 32,250

Bank financing: 96,750 @4.375

Payment: 483.06

Taxes: 216/month

Insurance: 66/month

Property management: 0 (we self-manage)

Vacancy/Repairs (15%): 198/month

Utilities: $170/month! This is our new information. The MLS ad said tenants pay utilities, it turns out that the landlord pays water, and we just obtained this figure a few minutes ago. This is a huge hit to my numbers.

Cashflow: $164 (this is the number I always focus on)

50% rule: $75/door/month 

2% rule: 1%

I would get the water metered out separately for ~$500. I'd probably drop their rents by $25/each, and make them pay the water (I'd still be ahead $120/month). I'd also do it on a month-to-month, and re-add the $25 next summer. 

Losing the water bill and dropping the rent a bit puts me at:

Cashflow: $292

50% rule: $65/month

2% rule: .94%

The property is in fantastic shape - we'd need no immediate work on it. Tenants mow the grass. I'd call it a B or B- neighborhood. The rents are right in the middle of market rate. This would be an easy place to keep rented, and maintain (I included repair costs/capex at 10%, but my husband also does all the maintenance/repairs, short of new roofs/furnaces)

I can probably talk the seller down a few thousand based on this new info - maybe $125k. 

Advice appreciated!

Thanks!

Pam

[Andy Argonaut]

This does not sound like a deal to me. Here's my analysis:

Current rents: $1325. 

Current expenses: $1133.06 (PITI + vacancy + utilities). Yes, you are doing the property management yourself, but you have to assign some value to that. Your time is worth something and you're deluding yourself by assigning zero dollars to it. So, let's go with 10%, which is below the market rate.

That puts your cash flow at just around $60 without taking into account any repairs. That's basically a negative cash flow property. 

The long and short of it is the 50% rule doesn't work for this property because the operating expenses are way too high, more like 63% without repairs and over 70% when taking into account repairs. And that's operating expenses i.e. debt service is not being taken into account.

Now, you can do the metering separately, but you're taking on more risk there. It's hard to say how much rent the market will bear by doing that and knocking off a few thousand dollars just doesn't seem an adequate risk to reward ratio. There should be a very significant discount on the originally negotiated price based on this new information that has been revealed to you. Otherwise, it's not a deal.