Update on buying a duplex. Any Advice?

Question

Hey Everybody,

I made a post about buying a duplex a few days ago and have a few pretty big updates I'd like to share and get any feedback I can.

I was able to talk the seller down to 255k on the duplex which was a huge win for me!

It looks like the city will also allow the basement to be turned into a separate 3/2 unit.

This would add an extra 15-20k to my loan, so the numbers below are for 275k

after the 3rd unit is added my units and rents would look like this:

two 3/2 units that are both 1308 square feet (each would rent for $1100-1200)

one 3/2 unit that is 1550 square feet (it should rent for $1000-1100)

EXPENSES

Mortgage: $1320 (without tax or insurance)

50% rule $1600-1750

Note: This duplex is relatively new construction (2003) so cap ex might be on the lower end (I still accounted for more) and the vacancy rates in the area are VERY low, lower than the 10% I accounted for. Just trying to be conservative

That has my monthly expenses anywhere from $2920-3070

My rent is in the range of $3,200-3500

By my math, it looks like an absolute worst case scenario is $130/month cash flow and a best case scenario of $580/month (this is of course assuming the 50% rule holds true.)

My question to all you investors, is should I pull the trigger on this Duplex?

(Sorry if this post looks similar to my other one....I think the numbers look a lot better with the lower price point, but I definitely want as many opinions as I can get)

Thanks!!!!

JR T. · Answer

It never hurts to try and sometimes going to a seller and humbling yourself by telling them that you misevaluated the property by plugging in those two units that aren't there yet, your financing partner rejected your evaluation BUT then offering to get him $285 if he delivers it turnkey or for X lower price that management has approved in consideration of your mistake, etc. etc.

P.S. I am not surprised that the deal looks better every time you get them to lower the price ;).

Thomas Brady · Answer

@Jr T. Very true, the seller shouldn't be paid on potential.

The numbers start to look REALLY good at 240-245k, but my realtor was telling me the seller currently owes 255k on the property, (He paid 313k for it in 2013) so that is why they are set at that price point. I can always try to get it for less (it doesn't hurt to try)

Thanks for the advice man!

JR T. · Answer

Even more than pricing it correctly the seller shouldn't get paid for your good ideas @Thomas Brady!

I was envisioning no plumbing and thus the $30k pricetag for two units. It really does not matter. The seller shouldn't get paid on potential.

I don't think that property is a home run, but it's not a bad deal either. It's just a run of the mill cashflow opportunity with the possibility for more. If you could find a 10 cap comparable I'd go back for another price reduction and settle there.

Thomas Brady · Answer

hey, I should have mentioned that the previous quote (30k) was to make 2 separate units out of the basement, whereas this one is to make one 3/2 unit. There are also two bathrooms already down there so we wouldn't have to out anything like that in. The contractor said it was pretty much putting a small kitchen down there, new paint, and carpet.

One more thing is that the basement isn't the traditional style of basement. It is underground at the back of the basement, but above ground at the front (with a deck)

I definitely agree with not counting your profits on conjecture so thanks a lot for reminding me of that. I was trying to be conservative with my numbers, but you never know till it is set in stone.

I requested the 1040 Schedule E from the seller so that will tell me more.

JR T. · Answer

Good advice: Never buy something based on what you think you will turn it into. You acquire assets based on what they're worth today, period. Not what you think it will do, not "once it's fully leased," (because it may never be). Take a long cold hard look at that asset and say - if I didn't have any ideas in my head what is this worth? If you pay your your ideas when you buy something they're not working in yet you lose the opportunity to GET PAID for them when you're ready to sell.

Comments about your deal: By the time you leave the closing table you will be into this for AT LEAST $285-290k assuming you are getting some proceeds to complete the renovation. Are the ground-level units 2 stories tall? Why can you only get one unit in the basement if there are two upstairs? I'm thinking to make two legal units your costs are off too - probably closer to $40k WITH the right contractor.

The problem with basement apartments is while they do rent and show OK tenants very rarely renew their leases once they learn what it's like to live with zero backyard, patio or other place to enjoy their summers. People who haven't dealt with them before overlook this but most people are gonna upgrade to a place with some sort of little patio at the end of their initial lease term. For a variety of reasons if I were proceeding with this I'd try very hard to fit two two bedroom one bath units in there over the configuration you proposed.

There's nothing wrong with your deal. It's an 8% deal. Better than you'd get in the bank, a nice little return, but nothing really sexy about it either. This is assuming the two existing units are so rent ready that you'll be able to show them while the place is in escrow and will go straight from the closing table to meet your two new tenants there with their leases and keys... if there's any work at all to get the upstairs units rent ready forget it.

Brent Coombs · Answer

@Thomas Brady, don't forget to review the responses to your previous thread again, because some of them still apply despite the (slightly) lower price that the Seller has agreed to so far. For example, after you said above: "It looks like the city will also allow the basement to be turned into a separate 3/2 unit" (hmmm, not a certainty?), you said: "This would add an extra 15-20k to my loan", whereas, you have already been previously advised that it is likely to cost $30k - and, maybe not a good idea at all. Just sayin...