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Updated almost 9 years ago, 02/22/2016
1st Multi-Family (duplex) deal
Hi all,
Thanks in advance for reading my post.
I found a duplex built in 2008 that is 2348 sq ft total that I'd like to add to my buy-hold portfolio. It's a foreclosure so the bank now has it up for sale. I've only seen pictures but will be looking at it in person in a couple of days. There is a rental next door that is also the same style duplex (built by the same developer) going for $850 (1 unit in that duplex is already rented) and other sales in the area (SF) going for $89k.
It's a college town and from sites like zillow the rents look to be $850-$1.2. Trying to compare apples-2-apples so the rentals that were older homes I'm not looking to compare. Also, this is a new duplex closer to the university and other homes are further away.
After running these through some calculations this is what I came up with (does this look right?):
Purchase Price: $114 (their price, I've not determined what to offer maybe $105 for lack of appliances maybe other things I don't know about yet)
Taxes: $2323 (talked to the appraisers office to get the 2015 valuation)
Terms: 30yr 4.5-4.8% fixed conventional with 20% down
Insurance: $1000 (guessing from previous purchases, this may be too much but I can't see it being more)
Appliances: all missing from both units except 1 microwave and 1 stove. will need to purchase 2 refrigerators, 1 stove, 2 dishwashers and 1 microwave. Estimating about $3000-$5000. Priced from Lowes was $2500, but I'm padding.
PM fee: 10% of rent
Unsure if 10% is on each unit. What is the norm for duplexes?
Vacancy: not sure what to put here
This is what I'm not sure of with my 1st year ratios:
Cap rate: 13.04% (I divided the purchase price by NOI) Now of course my NOI didn't factor in vacancy loss because I wasn't sure how to do that.
GRM: 5.51 (I divided the purchase price by the GSI)
Return on Equity(yr 1): 36%
COC: 70% (isn't this rather high?) (I divided the down payment by the NOI)
Debt Coverage Ratio: not sure how to calculate this.
I created a spreadsheet based on reading up on the formulas and also found a few spreadsheets that did the same calculations. Putting in the same numbers, gets me varying degrees of values within a 2-5% margin. And of course if the beginning numbers aren't correct then the calculations that rely on a previous calculation or value isn't going to be accurate. Arrgh I need a good spreadsheet!!
What I found was that one of the spreadsheets deducted the PM fee from the expenses so the Total Operating Expenses differed from my calculations. I have always looked TOE as including the PM fees. ?!?
What numbers should I be looking for in the Cap Rate, GRM, and Debt Coverage ( I think this is what lenders look at, correct?)
What should I be looking at to see if this is too much to pay for this property?
Thanks again BPers! :)
If you haven't already you can use the BP Rental Property Calculator or as Brandon Turner recommended in a webinar the Wholesaling Calculator (just put $0 as the wholesaling Fee) as it has more features. These may help you with the numbers you can't figure out.
Best of luck! And because you're in Gainesville I have to say... Go Gators!!
Thanks @Kadian F. I will have a look.
Here's what I'm coming up with:
Cap rate-16.1%
850x2x12=20400 total annual rents
I would say a high guess would be 10% vacancy.
20400x.90=18360 rents minus vacancy
18360/114000= 16.1% Cap rate
GRM-5.5
ROE-26%
COC-23%
DSCR-2.26 but I think this only makes a difference in larger commercial deals.
I would use 5-10% as the vacancy percentage. If you are confident that the unit will be rented consistently, 5% is good. Many rental properties in Gainesville are always rented, but it is prudent to build-in vacancy into your calculations.
May I ask what neighborhood or zip code the property is in? I have lived in Gainesville for over 10 years and have been a student and renter in several parts of town. I am assuming each unit is 2 bedrooms, so at $825 per unit that is a little over $400 per bedroom. That is reasonable, depending on the location and the quality of the duplex; however, many multi-families rent for less than that per bedroom, it all depends. Look at craigslist to see what other duplexes/SFHs are renting for in that area to determine the estimate rental price. I find Zillow to be inaccurate on a lot of their estimates.
Also, if the property is in one of the more "college" areas of town, make sure to rent the unit from August to August. I sometimes see houses in my neighborhood (one mile from campus) stay vacant during an entire semester because the landlord did not get the property rented early enough. When I was renting, we had to renew our lease for the following year by the end of February or the PM began showing the property.
Go Gators!
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From what I can see, it looks pretty solid. For a duplex in Florida (which I'm not familiar with) $114K sounds good, especially with $1700/month rent, which is about a 1.5% rent/cost. In a college area is all the better. I would usually use a 10% vacancy rate for calculations unless it's a really nice area, than maybe 7.5% or 5% or if it's really rough, maybe a 15%.
Thank you!!!
I redid the numbers in the BP calculator and came closer to the numbers in your responses. Although, the Cap rate came out to be 11.87 and the COC was 29%. I didn't do the vacancy %, which is why the percentages are off but now I have a good 'rule of thumb' to go by. Thanks!!!!!
@Derek Woods , @Michael Pierri , @Andrew Syrios do you use any prescribed spreadsheet? I'm having a tug of war on deciding what will work in the long run. I'd like to have a solid one in place to input all my property numbers to continue analyzing my properties. I've found several and have my own and I did use BP but I'm not a Pro member.
This is the first time I've used the calculations to determine if the investment is worth further consideration. Honestly, the last 2 rental purchases I just used a 'gut' feeling. I did the research but I didn't use any formulas or spreadsheet to determine the purchases. It was purely, "it's in a good neighborhood", "it's not older than 1980", "school district according to the PM was good and well sought after", "the cost was within or less than the comps", "other homes as rentals were doing well", "the interior and exterior didn't need much work Class B", "and the sky was blue without a cloud in it" :) Ok the last one was just for grins. I did do some force appreciation on the 1st and will be raising the rent when the current tenants vacate or if they decide to stay. I'll need to discuss with the PM since they have better statistics on surroundings.
So, with this potential investment I may be over thinking the process. There is a great need for me to understand how these calculations figure into "making a good decision".
The said duplex was built in 2008 and has other rentals around it for $850.
@Michael Pierri It's actually in Tallahassee and I live in Gainesville. I went to college there and have friends that live in the area. I looked in Gainesville first since UF and Santa Fe are here but I was not getting any hits on what I was looking for at $$. With 2 universities in Tallahassee and the community colleges, professionals, I'm thinking I will have a better chance at securing property.
Tallahassee also has somewhat lower mileage rate and the home $$ are in the range that I think I can get a better deal for sq ft.
@Andrew Syrios@Andrew Syrios I listened to you and your brother on one of Brandon's podcasts. Very good show. I've listened to a few and will be on Brandon's webinar tonight.
I'm meeting with a realtor that was recommended by my local realtor. Since there are no appliances I'm thinking the $114 will be negotiable, after all isn't everything. Hopefully, the property is what is appears to be.
Thanks again everyone for your input this was very helpful to me!
Good luck Daria! I love my little rentals in Gainesville FL but the deals seem to be going quickly this year, good that you expanded your search to other areas.
Huge disappointment!!! I saw the inside of the duplex and pretty much it was trashed - both units.
Too much to put into it for a buy and hold as far as I see maybe a flipper.
I don't think it was tenants this seemed too calculated but without knowing the full story it's hard to say if it was the owners. I've heard stories about homes that are destroyed because it falls into foreclosure and the owners remove appliances, punch holes in the doors and walls and literally damage so much that starting from scratch to replace and fix everything has to be done.
In this case, the duplex (both units) had what I described above. One was missing the heat pump (cha ching $5k easily to put one in)
This was a good learning experience in dealing with foreclosures. Immediately my mind started doing the ARV and pricing the repairs. LOL But I'm not into flipping - yet.
Pressing onward......
@Daria B. Did I read correctly that you found a good real estate agent in Tallahassee? I am looking for one who understands us...investors. I am looking to buy and hold in the Tallahassee area - duplex to quads. Will start out slow.
BTW - I have a son who lives in Tallahassee and another who lives in Fort Lauderdale but attends UF 1 weekend per month for his masters degree that he is getting online.
Sorry that deal didn't work out for you but like you said, it was a great education.
Originally posted by @Don Johnston:
@Daria B. Did I read correctly that you found a good real estate agent in Tallahassee? I am looking for one who understands us...investors. I am looking to buy and hold in the Tallahassee area - duplex to quads. Will start out slow.
BTW - I have a son who lives in Tallahassee and another who lives in Fort Lauderdale but attends UF 1 weekend per month for his masters degree that he is getting online.
Sorry that deal didn't work out for you but like you said, it was a great education.
Hi Don,
No, unfortunately that agent didn't work out. New nothing about working with investors. His boss is the broker and invests on their own but wasn't really interested in helping me. The other 1yr agent was who I was "handed" over to and that lasted about a day. I met another guy while searching for a PM who is also an agent and investor and have gained more information from him although I've still not bought anything in Tallahassee.
Originally posted by @Daria B.:
Originally posted by @Don Johnston:
@Daria B. Did I read correctly that you found a good real estate agent in Tallahassee? I am looking for one who understands us...investors. I am looking to buy and hold in the Tallahassee area - duplex to quads. Will start out slow.
BTW - I have a son who lives in Tallahassee and another who lives in Fort Lauderdale but attends UF 1 weekend per month for his masters degree that he is getting online.
Sorry that deal didn't work out for you but like you said, it was a great education.
Hi Don,
No, unfortunately that agent didn't work out. New nothing about working with investors. His boss is the broker and invests on their own but wasn't really interested in helping me. The other 1yr agent was who I was "handed" over to and that lasted about a day. I met another guy while searching for a PM who is also an agent and investor and have gained more information from him although I've still not bought anything in Tallahassee.
Bruce Carpenter
Broker/Owner Avenue Realty
I have tried many, and will only use him. He has flipped houses, brokered mortgages and is very savvy with notes. Not to mention that he personally handles all the listings, so the broker is handling the listing(which is a big plus to me).
I used him 1 month ago and he sold 2 condos for me in 1 week(full asking price). One buyer came up short on financing, and Bruce was able to find a note investor to cover the difference.Give him a call. (850)545-7408
Originally posted by @Don Johnston:
@Daria B. Did I read correctly that you found a good real estate agent in Tallahassee? I am looking for one who understands us...investors. I am looking to buy and hold in the Tallahassee area - duplex to quads. Will start out slow.
BTW - I have a son who lives in Tallahassee and another who lives in Fort Lauderdale but attends UF 1 weekend per month for his masters degree that he is getting online.
Sorry that deal didn't work out for you but like you said, it was a great education.
I can't get the @ to work, please sew the reply to Daria above. Cheers
Sebastian
Looks like it is working. Just type the @ with the persons name/handle with no space after the @. A list of 1 or more names should appear for you to select from. But both in your post are working.
Hey @Siye Baker
Thanks! I'll give him a call. My other resource hasn't yielded anything, although he's sent me listings we just have not come to terms on a property. I was close to putting an offer on one but it had HOA :(.
I went to FAMU "many" years ago so the place has drastically changed. I've made 2 trips from Gainesville to Tallahassee to drive around and get to know a little about the areas that I had found several properties.