First timer going for a duplex

[Yvette Chung]

Hello all! Would love to get your thoughts on this property that I'm very close to pulling the trigger on. I am new and have never owned anything so this feels pretty nerve wrecking so far. New Potential Property Duplex Purchase Price: 175K Rents per month: $2500Total RE Taxes : $6500 (taxes may look quite high to some because it's in NJ) Neighborhood - not the best town but it's not Camden either. As a girl I felt the immediate is relatively nice, just not one that I personally would want to raise a family in. Rental units appear to be in pretty good demand. No improvements needed at this point and the property already has two tenants. (One of the leases is ending soon) i will be putting 20% down and my monthly mortgage/Taxes/insurance payment should be around $1400 or less. For the first couple years I will be owner occupying one unit but eventually will rent both out. What do you think? Thank you all!

[James C.]

Yvette,

What do your comps say... they will drive that price of a 2 unit more than income.

I'll guess that the rents are equal.. so 2500/2 = 1250/mo. 

Doesn't meet the 1% test (175,000 * .01 = 1750) 50% test is not met either (1250*.5 = 625*12=7500/0.08 = $93,750), but those are only scan tests.

As a NOO it meets the 1% test, and passes the 50% test(2500*.5=1250*12=15,000/0.08 = 187,500).

Definitions: 

1% test: monthly rents should be equal to or greater than 1% of the price of the asset. 

50% test: 50% of the Gross Income/CAP rate (I used 8%) should be greater than the price of the asset.

Quick back of the napkin:

Gross rent (Owner Occupied): 15,000

Expenses (all yearly):

Taxes $6,500

Management (8%) = $1,200 (You will need to pay for your time as landlord)

Repairs (10%) = $1,500

Vacancy (10%) = $1,500

Mortgage (30, 5.25,20%DP) = $9,500

Insurance (guestimate) = $1,125

Total: $21,325

NCF = 15,000 - 21,325 = -6325 or -527 per month...

You would be paying 527 per month or more to live there. 

Note, that doesn't include 10% return of and on your money... or current expenses (the 10% R&V are for future expenses) add all that in, and you are over -$1,100 per month.

When you leave and rent the unit out, my best guess is that it will be negative cash flowing as well, but only slightly ~ -$200 to -$300/mo. At some point, it flips to positive cash flow... but it's out there.

Someone else might see this very differently than I do, so it's worth asking around.

Jim