Duplex -- Am I missing something?

Question

I am a beginning investor looking at a potential property that is about 40 minutes from where I live. The numbers look great and I wonder if I am missing something. Let me know what YOU guys can see.

Duplex: 2 Bed 1 Bath on each side renting for $650/side. Rent is a little bit above median but property has just been fully updated (assuming this is a flip for the seller) Separately metered.

Asking price: $105k

Down Payment (20%): $21k

P&I: $438 @ 4.75%

Property tax: $55

Insurance: $50

City utilities (water, trash, sewer): $95  -- Gas/electric paid by tenant

Misc Maintenance/cap ex: ~$200 (obviously would get a more accurate number with due diligence)

Vacancy: @4% = ~$40/month

Rents = $1300 - 50% rule = $650 - P&I = $212 cash flow. This generates the desired $100/unit.

One thing that does concern me a little bit is the fact that this house was built in 1887. Hopefully, everything was updated accordingly and not just covered up. I would obviously look much more in depth to this if I were to pursue this deal.

Is it naive of me to think that my expenses might be closer to 35-40% of my rents? I am not going to push the numbers in order to make a deal, but just looking for input considering there is already a $200/month allowance calculated in and it is recently remolded. Or should I realistically expect the 50% rule due to the age of the property.

Am I missing anything? Thanks!

William Hochstedler · Answer

The area between Washington and Harrison is not for the feint of heart.

• Make sure your property management is bullet proof or be prepared to make your presence known personally with a minimum of monthly visits.
• Be prepared to go to the property to collect rent.
• Many tenants in who rent in this area tend to be very hard on apartments.
• Tenant screening is an art more than a science as the vast majority of applicants have thin income and marginal credit (and criminal history)
• Of the close to 300 SFR's that have sold this year from 12th to 31st over 20% were short sales or bank owned.  Another large percentage were investors selling at cost or below.
• There are currently more Trustee Sales than bona fide third party sales on a monthly basis in this neighborhood -- meaning there's a lot of non-listed bank owned inventory.
• Rents are largely based on Section 8 bracketing so confirm with them what the maximum you can charge for your type of unit
• There are currently 20 unsold or active multi's in this area for under $100K.

In short, there are very good opportunities there for cash flow, but don't expect to sell anytime soon and make sure you have solid reserves (6-12 months of rent equivalent) to handle storms.  As @Nathan Emmert says, you should be looking closer to the 2% rule or 50% rule for these properties.  They're out there and not that hard to find.

Good luck.

Wm

Nathan Emmert · Answer

I'm guessing you're looking in Ogden?  I own 4 properties up there.

$650 a month for a 2 bedroom is definitely above market if the tenant is paying utilities (I get $650 each for an up/down duplex that has a 3rd bedroom in the basement and a 3rd potential bedroom upstairs and recently updated, beautiful property)... is this downtown?  Based on the age I'm assuming so?  Which side of Washington?  I'm working off memory here but the East side of Washington is the nicer area, more drug use on the west side.

Here's my math... I'd figure the property will normally rent for about $550 a unit.  You'll struggle with insurance.  Most insurance companies will want to insure replacement value instead of functional value.  Replacement value remakes the building exactly "as is" with old brick building, that's quite expensive... functional value would just be a new structure that provides equal rental income.  They'll tell you the value of the house is like $200k when you bought it for significantly less.  The best rate I could find was $3,000 for my 4 properties ($317k owed, $460k appraised).  Lets assume you can do similar and call it $800 a year in insurance.  Assuming you go to the Good Landlord program and get the reduced business license fee, I think it's $37 for a duplex each year in Ogden.  Taxes look about right, from 1/2 - 1 month of rent... I would guess they'll be about $800?  Your water is VERY low, especially for 2 bedroom units.  I would assume about $140 a month (water is expensive in Ogden).  Has the plumbing been updated?  Old buildings HATE cold winters (very painful lesson I learned last year).  Turnover in Ogden also tends to be pretty high as most people are living pay check to pay check and there is a lot of rental inventory.  Websites may say there's only 5% vacancy in Ogden but I'd plan the typical 10%.  With only 2 doors you'll also pay 10% property management.  What are you planning to do with snow removal and grass cutting?  Your cheapest route is probably to give a tenant a $50 credit to take care of it, can get ugly with the pros doing it on an as needed basis.

So where does that leave things, goodness.

Okay... $1,100 a month rent * 12 months = $13,200 = Ideal GOI

Minus vacancy (10% Ideal) = $11,880 = GOI

Minus Property Mgmt (10% GOI) = $10,692

Minus Water ($140 * 12) = $9,012

Minus license and insurance ($37 + $800) = $8,175

Minus Taxes ($800?) = $7,375

What would you like to use for repairs & CAPEX? 20%? = $7,375 - $2,640 = $4,735

So $438 * 12 = $5,256 per year in mortgage payments... you're in trouble.

$4,735 - $5,256 = $(521)

If we go up to $1,300 rent (what you proposed) you're at $6,199 - $5,256 = $943 cash flow on a $21k investment, about 5% CoC.  I just realized I forgot the credit for grass/snow... whoops!

In Ogden you should be looking for closer to the 2% rule.  A $120k 4plex rents for about $2100 a month... my $72k duplex rents for $1,300 a month.  I'm finding expenses up there closer to 55 - 60% because of the age of the buildings.  Good Property Management is HUGE as there are a ton of professional tenants up there and an $800 eviction plus $3,000 repair/rent ready will destroy you at these rent rates.  I'm "hoping" things will stabilize for me now that I've owned the properties 2 years and had all the tenants stabilized (1 eviction in 2014 and many lease renewals).

Hope that helps... and hope the property is in Ogden or I may be way off the mark :)

Nathan Emmert · Answer

My experience while out there were a LOT of Mormon investors superheating SLC and South.  With huge population growth and BYU, maybe it'll be a good play for them but I prefer cash flow.

Ogden is a friendlier cash flow environment but it's a rougher area with some nice areas, some normal downtown areas, and some rough areas.  You also get a HUGE range of CAP rates on properties with some sellers dreaming (based off Provo cap rates), some people flipping foreclosures, and others who have had rough experiences with tenants.

If you're looking to invest up there learn the area.  My recommendation would be to keep an eye on Craigslist and then drive your areas looking for FSBO and For Lease signs that appear more home made.  There are a lot of distressed properties that if you have the cash reserves to stabilize could turn out okay for you.

Cody Steck · Answer

Wow! That is great! @Nathan Emmert

Thanks for the information! Yes, it is in Ogden and it is east of Washington but only by a couple of blocks.

I like the information you provided. It is good to have some 'insider information' from somebody that has been in that exact market. So, it looks like the rents are higher than they should be and the numbers for water and vacancy are too low. I also forgot PM but even with taking that out it does not provide a good cash flow number.

There is quite a few properties listed similar to this and I've wondered to myself -- "if those are such good numbers, why isn't anybody picking these up?" Now I can see why.

Thank you for the information, it is exactly what I was looking for. Looks like I need to continue to research the market and refine my numbers.

Duplex -- Am I missing something?

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