Requesting help analyzing my first buy and hold *Duplex*

[Jordan B.]

I have always been interested in real estate since I was a kid. Family members have always had rental properties growing up and I am familiar with the pro's and con's. Recently within the last 6 months I have taken additional steps to educate myself on entering this business venture. I have been reading a lot of books, listing to podcasts and getting to know my farming area better. I am also starting my real estate classes at the end of this month in order to get my license. 

The deal in question is a Duplex and it is currently being rented out. One tenant is month to month and the others lease ends in April 2015. Here are some details

Asking Price: $170,000

Rent Unit 1: $950

Rent Unit 2: $850

Property Taxes: $3,890

Current Cap Rate: 1.05%

Revenues: $21,600

Expenses: $1260

(Trash: $800)

(Sewage: $460)

I will most likely be going with an FHA loan with a co-signer. I am hoping at setting on a $150,000 purchase price and I feel each unit has potential to get $1,000 per month in rent.

Potential Cap Rate would be 1.3%. Tenants pay all utilities except for sewage and trash. I will manage the property myself. 

Is there anything else i may be missing here? thoughts?

[Phillip Coleman]

Hello Jordan,

Thanks for the post.  I really enjoy evaluating opportunities and you have a good one with lots of variables.  This will be a good exercise that you will learn from.  I'm sure that your reading has given you a lot of tips about how to evaluate properties so if you'd like you can compare my ideas with what the experts have already said.  This is my first response and I hope that something I post either reinforces that you are on the right track or makes you think.

You need to develop a model that can be used to evaluate deals like this and quickly.  A good opportunity won't stay on the market long and you want to be able to know when to drill-in for a potential purchase.  If you are comfortable with Microsoft Excel then you can create a spreadsheet to determine multiple ratios (cap rate, cash return, RV, etc) or you can use something more simple on paper.  Either way it is good to have an objective, repeatable process that you can go back to again and again.  

To address your question about what things to consider outside of what you've posted here are my thoughts:

• In the revenue projection I would add in an allowance for vacancies.  I like to use one month (which removes 1/12 of the revenue) because I feel that it is reasonable for areas where I purchase.  
• When considering expenses to determine your cash return include all out of pocket items. Besides the trash and sewage I would add in insurance costs, maintenance (depends on age and condition of property but one month's rent is a good start), and obviously the mortgage payment based on the terms of your FHA loan. I think you included most of this because your cap rate seems to reflect it.
  • Because the property is occupied then it doesn't hurt to ask the seller if they can produce a listing of their expenses over the past 12 months.  They may say "no" or that they don't have them but it is free to ask.

So, as a point of caution I would not take the seller's information to be truth.  If you are serious about the purchase then I would validate it for myself (taxes based on your purchase price, rental comps to rationalize revenue projections, etc).  Once you make the offer then the real work begins because you can inspect the units (it is more difficult to do this when they are occupied) so that you can find any gotchas and understand the true cost since you would inherit any maintenance items that the seller won't remedy.

I wish you good luck.  Self-managing is really fun and I'm sure that you will be a great property owner.