Duplex Analysis in a B/C neighborhood

[David Yu]

I am looking at a property that needs some work.  It's not a show stopper, but I think it cash flows and wanted to get some opinions to see if there's something I'm missing and if I should run away.

Duplex, both units are 2/1

B/C neighborhood, but it is improving and I could see it being a solid B within 5 years or less

Asking $90K.  The property needs $15K - $20K in updates, but the tenants have both said they'd be willing to pay a higher rent if the upgrades are made (amount of increase to be negotiated)

Both sides rented out to tenants paying $525/mo. who have been there 5+ years and, per speaking with them, have no intent to leave

Putting 20% down

Hopefully, I would be able to get the price down a bit, but there's still a lot of moving parts and I am just wondering if it's a major mistake to even consider buying this place.

Monthly Summary
Rent In	1,050.00
Mortgage	344.55
Insurance	62.50
Prop Tax	191.67
Other (Lawn and pest control)	150.00
Misc Repairs	83.33
Capital Accrual	105.00
Net Cash Flow	112.95

[Kathy Henley]

It is worth a closer look. Are you going to buy and hold?  Or will you sell it?

Your insurance payment looks low, do you have a broker and a quote? Your repair figure looks low for a building with deferred maintenance; you can adjust this once you have been inside each unit. Older systems need more repairs. What is on the list of 'needs work'?  For the neighborhood to improve, the buildings need to improve. This costs money.

What is the after repair value?  I ask because if you are going to borrow 80% and pay for the improvements out of pocket, you may want to refi, a year out, to recoup your out of pocket repair costs. Are there separate meters?  This allows your tenants to pay the light bill.

What are the market rents for 2 bedrooms?  When the improvements are made, how much can you raise the rents and to improve the cash flow?   Will the neighborhood support your new rents? You do not need to negotiate new rents, you are a business person and the market will set the rents. Don't overlook the vacancy factor on your analysis, as there is always a pause in cash flow between tenants.  Setting aside 8-10% is normal. 

What are the normal expenses that your tenants will expect you to pay?  Sewer, water, gas, lawn care and trash are mine. The expectations are local, ask your agent.  Put the expenses on the list.

Do you have a lender lined up?  25% is the common downpayment for investors.