Is this Duplex a good deal?

Question

As this is my first investment purchase and it would be an out of state investment I would have a property manager continue to run, I would REALLY appreciate any feedback or input!!!!

VERY Long Term Tenants (claim is 20+ years) in each unit are family members (brothers)
Unit 1 - One is section 8 – check straight from govt. ($350)
One is on social security and is disabled – other pays rent cashiers check ($275)
Unit mix 2 x 2 bd/ 1 bth 
Here are the numbers:

Price $26,000 (they will only accept cash) I can come up with about 10k in cash but would have to take a personal loan to cover the rest

Gross Rent: 
$7,500   (100% occupancy consistently)

Expenses –
A) $1975 (owners claims with property mgt included)
OR –
B) $3000 (if I assume a 40% of rents =expenses)

NOI:
$5,525 (if use A expenses)
OR
$4.500 (if use B expenses)

Even if I was to 100% LTV at a $26K price at approx 7.5% 
Annual Debt Service would be: $2340

So Annual positive Cash Flow would be: 
$3185 (if expenses A – owner claims) (or $265 a month)
OR 
$2160 (if expenses B – using 40% of gross rents) (or $180 a month)

Repairs known (before property inspection) needs new exterior and interior paint (additional $1,500), Roof is approximately 10 years old 
The money seems small but consistent

Duplex Located in Buffalo, New York

There have been a lot of foreclosures in that area – some I can tell were investors
On the plus side, these tenants don’t seem like they are going any where soon. 
When I ran the cash on cash return and looked at the cash flow it looks pretty good, even if you were to finance it at 100%

So what do you think?
Thanks!
Holly

Jim Camp · Answer

Holly,

I can probably help since I live in Buffalo...I am a licensed RE agent, a licensed property inspector, and own a property managment company here.
If you need help please feel free to ask me, there are alot of good deals here in Buffalo but you really need to beware of the scams here also.

contact me if you would like.

Jim

Tom C · Answer

Holly,

I would look at this property this way. Don't over complicate it with trying to figure out what your future expenses are going to be, other then what you know now.

Initial investment 26,000
Closing Cost          1,500
Paint	            4,000

Total known investment 31,500 Payment 30 yrs 6.5 % = 200 per month.

This is could be a good deal in your area. My fear is that your rehab expense could include much more then just a simple paint job, which is going to raise your total investment. I would not use the current owners numbers, other then what he is getting in rents now. Taxes, Insurance and who pays utilities could make this a loser real fast.

Also, how much equity will you have at purchase and then after the paint job?

Cindy Nevarez · Answer

Hi Holly,

I am not an expert by any means. The only rental I've ever owned so far was a new condo in San Jose 20+ years ago. However, I have had quite a bit of experience with older homes since then. I've also been reading about this subject and talking to many people in the industry.

If I was me in your shoes...I would certainly be interested in this project as well, however, barring a major problem at inspection, I would think about the fact that the owner possibly claims low expenses due to deferred maintenance. It sounds like the building is older, and there may be a lot of things that are needing to be done, but have not. So ask yourself would you be able to replace the AC units if needed? Would you be able to deal with major plumbing issues?

Also, these gentlemen sound as if they are very old...if they were to pass on, would you be able to immediately occupy the units without major work first? Would you be able to raise the rents to cover it?

Let say they last for years and years...would you be able to raise their rent to cover the needed maintenance? Surely the roof is already due...or will be soon. My father lives in a 30+ year old building in the Ozarks of MO where the weather is not nearly as harsh as Buffalo...and he has to do his roof every 10 years.

Also, you mention there a lot of foreclosures there. Are there a lot of buildings standing around empty? Are people such as yourself coming in and buying them up? Or are they being ignored? People get nervious about living in a ghost town...esp. when they see more and more emptying out as the months go by. I know because it's happening here in AZ. We have whole neighborhoods standing empty. That's scary to a lot of folks...and they leave and don't come back unless they see some activity to improve that situation. If your gentlemen depart one way or another will the surrounding vacancies scare away other tenant prospects?

Also, are you close by? would you be able to drive there and back in a day? Surely you would have to be there during the inspections. Also, if repairs were needed do you have people to do that for you, or with you? Are they close by? Certainly you wouldn't want to be flying back and forth for a low income place like this.

Finally, I would create an exit plan contingency before closing so you would be able to verify important points like these and also the expenses and income the owner claims. I would also find out the costs of these possible problems on that particular building so I would know what I might have to put out later.

There's lots more that could be discussed, but I would think about these first.

BTW, are you including taxes and insurance in your figures? I understand some areas of NY can be high taxes...find out what they will be for the next bill. If you do lots of improvements to the building...that could raise it quite a bit too.