Salem Duplex Analysis - Am I looking for too much?

Question

Hi all! I've been looking for a deal in Portland for quite a while but the lack of options in my price range has led me to look farther out. I found a duplex in Salem on the MLS, put in an offer, and they accepted contingent on inspection.
After doing my due diligence, inspecting the property, and running the numbers I'm getting cold feet on this deal. It just looks marginal to me and I would be using all my investment cash to make this happen along with some HELOC money. I'm not sure if I should keep my powder dry and keep looking or take the plunge. Let me know what you think.

Details
Purchase Price: $210,000
Rent Estimate: $2,100
Down Payment: $52,500 - 25%
Closing costs: $6,424
Renovation: $10,000 - some minor issues with the property, this is very pessimistic estimate
Mortgage Rate: 4.85% - really unhappy with this number but multiple lenders gave me the same one

Monthly Costs
Property taxes: $158
Insurance: $82
Property Mgmt: self managed but 10% otherwise
Vacancy: $105 - 5%
Capex: $210 - 10%
Owner paid Utilities: $140

Financing
Mortgage: $831.11
Monthly Expenses: $695
Monthly Income: $573.89
Annual Profit: $6,886

Gross Yield: 12%
Cash on cash: 9.99%

John Leavelle · Answer

@Christopher Peterson

Sounds like a very familiar tell.  I only have three properties.  So I don't claim to be an experienced real estate investor.  However, I do have other types of investments.  And have very conservative analysis criteria.  I would have walked away also.  Keep looking, stick to your criteria, you will eventually find what you are searching for.  Good luck.

Christopher Peterson · Answer

Thanks for the reply @John Leavelle, I really just wanted to get a sense if other people thought this was a good deal and after all the responses it seems like its just an 'okay' deal. For something straight off the MLS its good but I want to do better. A cash on cash of 10% just doesn't seem worth it.I did have an inspection and put together a SOW. I didn't have time to get everything bid out for repairs but the bigger ticket items (windows, and water leak in bathroom) I did. My agent and I did push back on the purchase price because of the work needed but there were multiple offers, at least one in cash and the seller's agent basically told us to pound sand. At this point I've walked away from it.I did put together a list of comps and the purchase price would be at market. This was another big concern of mine. The property would cashflow but there would be little initial equity and while Salem is growing its not anywhere close to Portland levels. I wouldn't be able to pull equity out for a while to move on to other deals.I did a lot of research into market rents. I called multiple property managers, looked at all the popular rental listing sites, and posted my own ads to gauge response rates. The nicer unit could support $1050, the not as nice one $950.There were improvements to the units that could be done to increase the rents some but the neighborhood wouldn't really support much higher prices.

John Leavelle · Answer

Howdy @Christopher Peterson

I may be a little late for commenting, but, here's my 2cts.

From an overall general analysis this is a decent deal.  Expected rental income is 1% of purchase price.  And it passes the 50% rule for Cash Flow ($1,050 NOI - $831.11 P&I = $218.89 monthly CF).  Your listed Op Ex (including PM) is only $905 (giving you $363.89 CF).

Did you have the property professionally inspected?  Did you develop a Statement of Work (SOW) based on the inspection?  And get a bid to determine cost of repairs?  If you did use these to negotiate a credit or discount on the purchase price.

What Market analysis have you done?  Did you establish a good ARV/Market Value of the property based on recently sold comps.  Is the purchase price at the Market Value or below?  What are the Rental Market rates?  Do you have room to raise the rents after some improvements?

If there is room for property improvements and/or rent increases then you might not want to pass this one up.  That is, If you have validated the operating data and condition of the property.

Christopher Peterson · Answer

I am a beginner and this would be my first deal. I think the numbers are okay but not amazing and it would deplete all of my investment cash. If another opportunity came along I couldn't jump on it. I mostly just wanted feedback on the overall return and whether people thought it was good or not. In my position would this deal make sense?

This property would cash flow but I am paying market price so would have little equity and lots of tied up cash. I want to do better than this.Rants are fine @Neal Collins, there is a fair amount that's not perfect with the property and we have negotiated. I expected cold feet since this is new to me but I expected to be more sure about this than I am. There is a balance here of course though, if I wait for the perfect deal, I'll never get any deals.

Neal Collins · Answer

First off if you back out of your contract have a better excuse than "I'm having cold feet." A better reason would be the anticipated scope of work in order to get market rent that you have found after doing your due diligence. Deal in good faith and at least attempt a negotiation before dropping out.

This is a bit of a rant but there is nothing more frustrating than people tying up property and then simply backing out because they get cold feet. We were representing a client that had this mentality and ultimately had to drop them because it isn't worth the time or hassle trying to teach someone how to deal in good faith as an investor. It's also a good way to ruin your agent's reputation.

Second thing. Many residential plexes don't have separate water meters. This is a pretty easy thing to get around. The more sophisticated method is to bill back the water bill on a pro-rata basis according to either the number of tenants in each unit or the size of each unit. This method is actually highly frustrating when you take into account move-in and move-outs and vacancies. It's so much easier just to charge tenants a separate water utility charge on a per person basis. There are some downfalls to this approach but I guarantee you it is worth it in the end.

As for the electric, that is worth separately metering and this would be a big negotiation point for me.

Christopher Peterson · Answer

It is on one meter @Peter James and I haven't got an estimate on the cost to separate it. Electric shouldn't be an issue but water is a bigger deal. I have requested the utility costs to get a sense of whether it would be worth it separate or just charge extra and include it.Is the rate of return i'm seeing something others here on BP would pursue?

Peter James · Answer

Okay, I know that one. I think your numbers look fine but do believe it needs more then 10k.   I've talked to a few folks and was told it needs a new roof and other minor updates.  It's definitely dated and appears to have delayed cap x but nothing major.  Is it on 1 meter?  I'd look into separate meters so the tenants pay all utilities and improving your numbers.  Tenants are used to paying there own utilities around here.  I'd be happy to recommend local construction companies if you'd like.

Cheers

Christopher Peterson · Answer

No @Peter James  the duplex i'm looking at is off Pennsylvania ave. No creek near this one.

Genna Golden · Answer

I have a property with flood insurance and it goes up QUITE A BIT each year.

Peter James · Answer

Hey Chris!  If you're referring to the duplex with the creek in the backyard and sits on the floodplain terrace your dealing with flood insurance.  Perhaps they have the flood cert?  My agent said best case scenario $1500 all the way up to $3000 annually negating cash flow.  Plus your dealing with FEMA.