Second opinion on duplex. Worth it or not?

Question

Hello everybody,

I'm having a bit of a hard time figuring out how to quickly filter properties that are worth it vs ones that are not. What's the best approach to doing that without seeing the property, and just performing the initial evaluation by looking at listing and photos? At least to narrow a big list down to properties that are worth visiting in person. Is it mostly looking at comps?

I've listened to a number of Brandon's podcasts about using the excel spreadsheet but any pointers before you get to that point?

To give you an example, I've been keeping an eye out for duplexes, triplexes or quads with at least 1 unit having 3 bedrooms 2.5 baths, or even 1.5 baths with the intention of adding a second bath. However, they've been harder to come by than I thought.

Is this 2 bedroom per unit duplex worth pursuing you think? According to my REA it's in a nice neighborhood.

Here is some additional information:

SQ FT: 1,800Sale price: $260kYear built: 1980Taxes: About $3,500Gross income: $20k/yearRent multiplier: 12Operating Expense: $10k/yearNet income: $11kParking: 2 car garageRents include water/sewer/garbage/landscaping and according to the REA it's been well maintained and always rented. It has been on the market for about 2 months now.

Thoughts?

Thank you!

-Ben

John Leavelle · Answer

@Ben D.  you state a NOI of $11,000.  That's only $917 per month.

How would you finance it?  Conventional Bank loan?  Even with excellent credit, you might get something like $260,000 - $52,000 (20% down) = $208,000 mortgage

3.625% APR (30 yr.) = $949 PMI

That's  $32 in negative cash flow

I wouldn't  give this a second look.

John

Michael Le · Answer

@Ben D. you can those numbers from the seller. If you decide to go forward with a deeper analysis then you can call your own insurance company and get a quote, come up with your future capex based on the age of the property and prior replacements. Beware the proforma numbers they give you since they will always skew them to their own advantage.

Steve Smith · Answer

@Ben D. I should correct my last post the property management companies charge a percentage of one months rent when they fill vacancies that's why I use 11% instead of a standard 10%

Sorry about that

Steve

Steve Smith · Answer

@Ben D. when calculating my numbers I use a percentage of the monthly gross operating income for vacancy I use 10%, for Maintenance I use 5% for CapEx I use 10%

I also use 11% for management as most property management charge a percentage of the monthly rent. I do this weather I use property management or not

I hope this helps. Please let me know if I can help further

Steve

Ben D. · Answer

@Michael Le, @Steve Smith

Thank you. I agree that those numbers don't make sense but that's what's on the listing itself. There is no information on CapEx, insurance or vacancies. What's the best way to go about filling in those details?

@Tammy Richards, thank you. That's helpful. I'll check out the file list and look at the calculators.

Tammy Richards · Answer

I've been looking at properties for months - come close to purchasing a couple, but have not been able to get the price I want for the cash flow I am insisting on.  So I've been at this a while.  I have analyzed, at this point, probably 300 properties using one of the downloadable spreadsheet in the BP files section.

I have to say, I now have a much quicker idea of whether a property will make sense when I run the numbers than I did a few months ago.  In my area, with old property stock, and with heat often included in the rents, it has to have huge rents to make sense - in my price range, that means big units, and a 4 unit vs. a 3 unit.  There are also a few towns with taxes that are higher,  or lower, that I know I have to account for.

The 2% rule isn't a great quick view in my market, but now often know from looking quickly at the MLS/rent amounts/number of bedrooms whether or not to bother plugging in numbers on the spreadsheet or not.

I'm also getting better when I go see properties - having had one deal crash after an inspection, I'm much more aware about potential foundation issues in the old buildings around here.

I'd encourage you to take the time to find a spreadsheet, or calculator you like, and run a bunch of them.  You'll learn your market that way.  You'll learn the tax rates of different areas, rents that different locations bring, and what adding on property management, maintenance, and CapEx expenses does to the spreadsheet.  After a while, it won't take long to get a quicker sense of whether or not a property will work for you, given your particular criteria.

Steve Smith · Answer

@Ben D. looking over your numbers I see no provision for

Maintenance, CapEx,I insurance, vacancies do not know if these are accounted for but they are not displayed

Steve

Michael Le · Answer

Hey @Ben D., the numbers you posted are a little confusing. How is it that you have gross income of $20k/year minus $3500 taxes minus $10k/year operating expense... and end up with net income of $11k?

I assume gross income already includes vacancies and economic vacancy. And even assuming operating expense includes insurance, property management, repair, capex, etc... those numbers alone would be $6500 in net income, no?

Ben D. · Answer

Forgot to mention, this specific one has 2 bedrooms, 1.1 baths on each side. Each unit is about 900 square feet.

Second opinion on duplex. Worth it or not?

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