Duplex Deal

[Stephanie Garcia]

Hello All,

I am considering this deal for $238,000. It is a duplex in a pretty nice area of Sacramento, CA. One unit has 3 bedroom and 2 baths. The other has 2 and 2 and it is rented for $850 which is kind of low. It could use a little work. Maybe after repair value would be $300,000, but that is kind of me hoping. In one of the units the kitchen sink would need to be moved back because it is really close to refrigerator and stove making the kitchen tiny. The one unit I was able to look at needs central heating and air. I am not sure how much that typically runs. I am pretty new at this. Can someone help me with the numbers I should be looking at or thinking about when going into this deal? One that is stopping me right now is having to put down a 15% down payment.

https://www.redfin.com/CA/Sacramento/5101-Coppersmith-Ave-95838/home/19207176#!

I appreciate all input. Have a great day everyone.

Thank you,

Stephanie Garcia

[Chris Vail]

@Stephanie Garcia Couple of things.

You say that you would offer 238,000 in your original post, how did you come to this number?  I know that is what the property is listed at but what calculations lead you to think about paying this amount?  What numbers did you use to come to this purchase price?  What return would this give you after factoring in all expenses?  I would say that the 850 for the 2/2 seems low, comps in the area look like to be in the average between 950-1000.  the 3/2 should be able to rent in the 1200 range +/- 50-75.  Which on the low side would give you ~ 950+1125 =2075 in rent lets take this as your starting point Gross income for the year 24,900

Now that we have an estimated rent / Gross Income lets start accounting for things...

Gross Income (GI): 24,900

Vacancy: -1,494 (6%)

Total Gross Operating Income (GOI): 23,406

Expenses...

Property management: -2,490 (assuming 10%)

Repairs and maintenance: -1,245 (assuming 5%)

CapEx: -2,490 (assuming 10%, I generally do a calculation for this on the age of every CapEx item for a property and it is generally around 5%, but this is a duplex so I am taking a short cut and doubling it since you have two of everything except the roof)

Taxes: -2,512 (From the eprop tax site for Sac)

Water / Sewer / Garbage: -2,880 (Approximate, generally around 120 per month per house, again doubled for duplex, you could pass this on to the tenant potentially but accounting for it for now)

Insurance:  -1,400 (this is a pure guess here)

Total Expenses: -13,017 ~55.6% of GOI or 52.3% of GI 

Net Operating Income (NOI): 10,389

Now that we have an expected NOI we need to figure out how much you can pay for this property and still make the return you are looking for. We can use cape rate as a short cut here even though it is not appropriate for a duplex generally.

Lets say you were looking for a 7% cap rate well you would take the NOI and divide it by your cap rate 10,389 / .07 = 148,4114 (this is what this property is worth to someone looking for a 7% cap rate. The purchase price you have listed above of 238,000 also has a cap rate associated it with it NOI / PP = Cap Rate or 10,389 / 238,000 = .0437 or 4.37%.

This is assuming you are paying cash for the full purchase price for this property to get this return, but we know you are not so you are going to have debt service costs. At your purchase price of 238,000 after your 15% down you are looking at a loan of about 195,500 which at a 30 year 4.75% loan your monthly payment is going to be -1,015.8 or -12,189.6 per year.

NOI: 10,389

Debt Service: -12,190 (Rounded)

Cash Flow: -1,801 per year :(

This is the cold hard truth of math.  Now you can manipulate the numbers all you want, for instance you can self manage the property so you will pick up 2,490 (but then you are saying your time is worth 0, Cash flow becomes 689 for the year. You could pass on the cost of the Water Sewer and Garbage to the tenant and pick up another 2,880 or bring your cash flow to 3,569 for the year.

If I was going to offer on this property with out walking it and really seeing what needs to be replaced and fixed prior to raising rent to command the higher end of rent I would offer in the 160,000 range for this property, but that is me and I am not you, so you need to really look at all of the numbers and calculate what your price for the property is and what it is listed at has no bearing on that decision. 

I hope this helps some, feel free to PM me or tag me here if you have more questions.  Happy hunting.