My First Deal: A Duplex

Real Estate Deal Analysis & Advice
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My First Deal: A Duplex

Chris V.
Investor · West Columbia, SC · Member since 2017 · 46 posts · 13 votes

Hey folks, well I think (hope) I finally found one that will work for our first deal. We are still in negotiations, and I could use any suggestions you fine folks would have. Couple top-of-mind questions I have:

1. Does this look like a good deal?

2. We aren't using RE agents, any trustworthy contract templates I can use? Any advice here?

3. Who should pay closing costs? What's typical today?

4. He was asking $75K, and I said I'd rather be at $70K, but that was before any inspections or anything else... and before we agreed to not do agents. I'm considering making an official offer of $65K with the fact that we won't be using agents AND he indicated he wanted to sell as-is.

5. Any help on the process including inspections needed, I'd greatly appreciate! I plan to line up a termite, home, and HVAC inspections.

6. What else should I consider? Thanks!!

Here are the details:

Current Price: $70,000 (still in negotiation)

Property Taxes: $2,613

2 units, both 2bed/2bath

New carpet, roof is 2 years old, heat pump is "fairly new" (i need to check this out), floors look ok, and the units seemed to be in decent condition when I visited today.

Rents: $600 per unit, both rented with one under lease, the other month-to-month

Insurance: He said he pays $1300/year for insurance so I used the same.

Loan Interest Rate: I simply could not find anything reliable to say what my rate would be. I need to talk with my lender tomorrow, but I am estimating 4.75% with no points on a 30yr fixed, conventional loan. My credit score is 800, and I have no debt. No clue what interest rate will end up at.

Closing Costs: Who pays those typically? I estimated $2,000.

Here's the screenshot of the Rental Property tool:


We did walk through the property today, and it really does look nice inside.

The left unit was well kept, smelled great, no issues. 

The right unit, the tenant has a cat and two dogs (not supposed to have pets, and he knows it), one of the bedrooms smelled distinctly like cat urine. There is also a few water spots over the kitchen ceiling which the owner said he'd have that fixed this week, assumed it was something to do with the HVAC drip pan or something. Also, the tenant didn't want us to go in the master bed/bath because he said his girl was back there and it wasn't clean. So no clue what's up back there, and should I require that I can walk that area first?

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Christopher J Lemmon
Investor · Little Rock, IA · Member since 2015 · 136 posts · 72 votes
9y
Chris V. I would not walk away. Don't be scared of making money. Every deal has its challenges. It's smart to negotiate hard. Kudos to you for doing that. But I would not let this deal get away for a few thousand bucks there is cash-flow in it! Also, one bad tenant is not a reason to walk. If you are in it for the long run, you will need to get skilled at selecting, managing and negotiating with tenants. You could be leaving a perfectly good deal if you walk. If you have one good tenant you can cover the mortgage until you deal with the less than ideal guy. The numbers look good to me. If you do a thorough inspection you will know what the incoming repairs are on your property will be. That's mostly what you need. If you have priced all the other costs, your good! I have found here on BP, there are a lot of deal spoilers trashing new investors deals when they float them on here. Some guys are so critical they never see a deal they like. There is room in this deal to get started. You have to start some where and you learn a lot jumping in on a deal and finding a way to make it work. A few months back, I looked at a few of the guys tearing my deal up on here, several of them did not even own one rental unit yet they jump in and try to tell me my deal sucks and I am an idiot for thinking it's good. You know this deal better than any other guy on here trying to comment. If it looks good and you have done due diligence go for it! The negative guys are like the opposite of a get rich quick guru. Don't let them burst your bubble. Your own the right track. This scenario is very close to one I just bought price wise and rent wise. And it's working out just fine for me, irregardless of the naysayers.
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  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    9y

    1. Does this look like a good deal? No, but I don't have all my information correct.

    2. We aren't using RE agents, any trustworthy contract templates I can use? Any advice here? Yes, hire a title company and a lawyer.

    3. Who should pay closing costs? What's typical today? Buyer generally.  This, like everything, is open to negotiations.

    4. He was asking $75K, and I said I'd rather be at $70K, but that was before any inspections or anything else... and before we agreed to not do agents. I'm considering making an official offer of $65K with the fact that we won't be using agents AND he indicated he wanted to sell as-is.  You will have a great deal more leverage on this once the inspection is complete.  DO NOT BE AFRAID TO WALK AFTER THE INSPECTION.  Make sure that your inspection clause in the P&S allows you to walk with no expenses.

    5. Any help on the process including inspections needed, I'd greatly appreciate! I plan to line up a termite, home, and HVAC inspections. Pay for a profession inspection.

    6. What else should I consider? Become HIGHLY familiar with the eviction laws in your state/county/town.  Also figure out what the tenants can use against you in terms of unfinished repairs or safety hazards on the site.

    I plan to manage the property myself. This is fine, you still need to account for the 10% PM fee.  At some point in your life you are NOT going to want to manage it yourself.

    The current renters handle all utilities themselves. Everything, everything? Or just some of the utilites? Electric, Gas, Water, Sewer and Trash are all possible costs.  Do the tenants over ALL of those every month?

    Can you get the month to month tenant out?  I recommend this especially if they are the ones with the pets and the room they don't want you to see.  If you can get the whole thing vacant, I'd go with that.

    This is a deal I recommend you walking away from. Even if your tenants are paying Sewer/Water and trash the ROI on this only goes up to ~9.75%. The place sounds like a headache already.

    Now If you can get it for 60-65k and your tenants are paying Sewer/Water/Trash you should be able to have a property paying you $200+/month with ~13% ROI.

    Here are the numbers as I see them:

    % Down Payment 25.00%
    Down Payment $ 18,750
    Remainder of closing costs $2,000.00
    Total Due at Signing $ 20,750
     
    Mortgage Rate 4.75%
    Length of Mortgage in years 30
    Monthly Mortgage payment $293.43
    Taxes $ 217.75
    Sewer and Water $ 50.00
    Trash $ 75.00
    Heat/Utilities $ -
    HOA $ -
    Cap Ex and Ops $ 200.00
    Insurance $ 108.33
    Mgmt Fee $ 120.00
    Vacancy $ 96.00
    Total Expenses $1,160.51
    Unit 1 $ 600.00
    Unit 2 $ 600.00

    Total Revenue $ 1,200.00
     
    Cashflow/month $ 39.49
    Cashflow/year $ 473.88
    Cash on Cash Return 2.28%
    1Reply
  • Chris V.
    OP
    Investor · West Columbia, SC · Member since 2017 · 46 posts · 13 votes
    9y
    Aaron Montague thanks for the feedback man!! So I found out more details. My rate is looking like it will be 4.875% on a 70,000 purchase, 25% down. Utilities, owner says the tenants pay electric, water/sewer, but the owner pays for trash pickup so I need to verify the cost by calling the local company. I do wish the month-month tenant was gone, because he apparently just doesn't follow the rules, even though he's been there 2 years. I am now factoring in 8% vacancy and 10% PM.
    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    9y

    @Chris V. This looks like one to walk away from.  Tough tenants, fixes probably coming due sooner rather than later, etc.

    Rerun your numbers and see what you come up with. I don't look at anything that isn't returning me $150 and 10% CoC for Buy and Hold deals.

    2Reply
  • Chris V.
    OP
    Investor · West Columbia, SC · Member since 2017 · 46 posts · 13 votes
    9y

    @Aaron Montague yeah I'm starting to lean that way on this one.  I offered him $63K, plus he pays $4500 closing costs, plus he evicts the tenant on the right side and allow a full walk-through on that side. I am thinking I won't hear back from him.

    I think I'm having trouble understanding where people find acceptable cash flow + CoC . Said differently, I am not seeing the key factors that will directly cause cash flow to be $150+ while also providing at least 10% CoC return.

    What I've figured out is that the less cash that comes out of your pocket, the better your CoC return is. Also, the more you finance (which leads to lower cash out of pocket), the worse your cashflow is because your mortgage payment is higher.

    So the correlation I see is: the higher the CoC, the lower the Cashflow.

    0Reply
  • Christopher J Lemmon
    Investor · Little Rock, IA · Member since 2015 · 136 posts · 72 votes
    9y
    Chris V. I would not walk away. Don't be scared of making money. Every deal has its challenges. It's smart to negotiate hard. Kudos to you for doing that. But I would not let this deal get away for a few thousand bucks there is cash-flow in it! Also, one bad tenant is not a reason to walk. If you are in it for the long run, you will need to get skilled at selecting, managing and negotiating with tenants. You could be leaving a perfectly good deal if you walk. If you have one good tenant you can cover the mortgage until you deal with the less than ideal guy. The numbers look good to me. If you do a thorough inspection you will know what the incoming repairs are on your property will be. That's mostly what you need. If you have priced all the other costs, your good! I have found here on BP, there are a lot of deal spoilers trashing new investors deals when they float them on here. Some guys are so critical they never see a deal they like. There is room in this deal to get started. You have to start some where and you learn a lot jumping in on a deal and finding a way to make it work. A few months back, I looked at a few of the guys tearing my deal up on here, several of them did not even own one rental unit yet they jump in and try to tell me my deal sucks and I am an idiot for thinking it's good. You know this deal better than any other guy on here trying to comment. If it looks good and you have done due diligence go for it! The negative guys are like the opposite of a get rich quick guru. Don't let them burst your bubble. Your own the right track. This scenario is very close to one I just bought price wise and rent wise. And it's working out just fine for me, irregardless of the naysayers.
    4Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    9y

    @Christopher J Lemmon

    What are the numbers about this deal that you like?

    0Reply
  • Jim Costa
    Investor · Washougal, WA · Member since 2016 · 86 posts · 52 votes
    9y

    Man your taxes are high.  @Chris V. The most important thing to know is your numbers.  One of the things you didn't really discuss was the market.  What is the vacancy factor for your area.  We have a really tight market and vacancy under 5%.  What are current rents going for within a few mile radius.  Zillow and Craigslist are a great resource to find out what your competition is.  They both have map features so you can narrow in on your neighborhood.  Are your rents high or extremely low.  Investors in our area that have had property for several years and self managed are several $100's of dollars off of market rents.  I agree with @Aaron Montague know the process and under what circumstance you can evict.  It would certainly be better for you to purchase with the vacant unit.  

    Their are many ways to look at numbers and reasons for investing in real estate.  Cash flow is one reason.  Although most don't figure in,  their is appreciation, depreciation, interest deductions, tax write off's, expenses.  

    I don't agree entirely with @Aaron Montague numbers.  He took the things to the extreme but are a possibility  You need to look at things the other way and average them out  IF you did get for 70K or even 65K the numbers drastically change because of the small numbers but lets assume 70K:  

    Here are the numbers as I see them:

    % Down Payment25.00%                 YES
    Down Payment$ 18,750              $17,500
    Remainder of closing costs$2,000.00            Seller Paid
    Total Due at Signing$ 20,750              $17,500
    Mortgage Rate4.75%                    4.74%
    Length of Mortgage in years30                          30
    Monthly Mortgage payment$293.43                 $273.86
    Taxes$ 217.75                  $217.75
    Sewer and Water$ 50.00                      $0
    Trash$ 75.00                      $50/mo
    Heat/Utilities$ -
    HOA$ -
    Cap Ex and Ops$ 200.00                 $100
    (major expense roof done)
    Insurance$ 108.33               $60
    Mgmt Fee$ 120.00               $0 self manage
    Vacancy$ 96.00                 $96
    Total Expenses$1,160.51             $797.61
    Unit 1$ 600.00                $600
    Unit 2$ 600.00                 $600
    Total Revenue$ 1,200.00              $1200
    Cashflow/month$ 39.49                    $402.39
    Cashflow/year$ 473.88                  $4828.68
    Cash on Cash Return2.28%                       27.59%

    Many ways to look at numbers. Yes I took out the self manage fee I manage all my own property and find that I do a much better job than any property manager I hired. I recommend joining your state landlord association. Great wealth of knowledge and will have all the rental forms you need. Ours is like $50 a year. I find that the extent of managing is when someone moves out and you need to flip the unit and rerent. You have two options, you can do all the work yourself and save money or become a general contractor for 1 weeks and manage workers to paint the unit and clean the carpets and do any other repairs. Once units are rented you will rarely get calls throughout the year if units are maintained. The amount of management is no different than researching stocks and investments to get a general understanding so your investment broker or "managed" portfolio isn't fleecing you. Your mutual funds and 401K also have a management fee on top of all the time and research you do. As an owner of real estate you are not managing $1200 income but a $70000 property (many ways to look at numbers). I am assuming your garbage will be $100 every 2 months so I used $50/a month. CAP EX is a tricky one. I believe this is where most people get in trouble because many novice investors have never heard of it or even account for it. Capital expenditures and improvements will happen. The largest expense is a roof. Most people buy a property with a 15 - 20 year old roof and the inspection shows the roof has at least 5 years left which is all the bank needs. 7 years later the roof starts leaking and now the investor needs to put in $10-12K for a new roof. If you saved over the last 7 years that would be about $140 a month in capex just for that expense. You add appliances and hot water heaters you end up at the $200 quick. I agree with his number but because the major expense was just done and many new roofs have lifetime or 40 year guarantees you should only have to budget about $40 instead of $140. That is why the reduction in Cap ex. Insurance seems extremely high for a 70K property but don't know the replacement cost in your area. A quick 15 minute call to your insurance broker can verify that cost for free. Vacancy you will have even if only once every 2-3 years. The longer the unit goes with same tenant the less expense you have from year to year and vacancy number gets added to your pocket but when they move out you can get away with a $90 carpet cleaning. You will now have to paint and in some instances replace flooring like in your current situation with pet man. The ideal situation for a first time investment property is to buy a multi unit (1-4) that you can move into. You are able to get owner occupy rates and as little as 3% down. Run the numbers there! As people get older and begin families it gets harder to sacrifice.

    Bottom  line is know your numbers.  This property has the potential to meet your goal for the year.  Screen and pick the right tenant.  If you can't increase your income than control your expenses.   When you sign a new lease have the tenant pay for garbage.  Many places the owner is ultimately responsible for unpaid water and garbage bills.  Be sure you collect enough deposit to protect yourself.

    3Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    9y

    @Jim Costa I like your numbers better than mine.

    My view:

    Trash - How do you only spend $50 on trash every month?  My dumpsters are $89/87/87 for a 2 yard dumped every 3 weeks.  This was the cheapest option from 3 different companies.  More power, and money, to you, this number seems rather low to me.

    Cap Ex - This is always a tough one, I agree.  I can safely say that my $200/month for my Duplexes over the years has been a fairly accurate number.  Your point on the roof is well taken.  @Chris V. check with the seller and make him produce the warranty if there is one.

    Management Fee - This is where Jim and I disagree on a philosophical level.  If you figure in $0.00 for a management fee as a self management fee you are bound to stay with that property financially and physically. With Jim's numbers you can "lose" $120/month as a PM fee and still have this be a good deal.  If that amount is the difference between making and losing money on a deal you are screwed if you want to move.  Unless the place is easy to sell of course.

    Sewer and Water - If you can get your tenants to pay this bill, more power to you.  Be aware that if they are NOT currently paying it they are under no obligation to accept that bill.  Sewer and Water bills are generally a lienable(sp?) bill as well.  So stay on top of this bill even if they agree to split it and pay it somehow.

    You have our perspectives.  Go forth and make money!!

    1Reply
  • Jim Costa
    Investor · Washougal, WA · Member since 2016 · 86 posts · 52 votes
    9y

    @Aaron Montague Nice to see you are a little flexible.  The point I was trying to make is that sometimes what is on paper isn't what is actually shown in the pocket book (sometimes better sometimes worse).  If people want to be "real estate investors" they need to buy a property and see if it is for them.  Their's no experience like doing.  

    Garbage is cheap here.  I have duplexes that are $87.18 every 2 months ( That's for 2 - 40 gal containers picked up weekly and 2 - 95 gallon recycling picked up every other week)   I have a 4 plex in another town that's  $61/month picked up weekly.   

    I agree ultimately you will have to put a management fee into your number.  The banks are going to use.  But, I think all owners starting out should learn to manage there property.  You need to know what to look for, how to read a credit report and background check.  How to obtain one.  What is needed to flip a unit.  How to fill out a rental contract.  What forms are required to give to tenant.  At the beginning, for the first one or two properties this is a learning curve and a big chunk of "profit" that goes into your pocket.   You are actually paying yourself to learn!  It is also one of the few expenses that is completely optional by you.  If your roof leaks or toilet breaks, you have to fix it.  Once you understand what you are doing you can either choose to keep more of your profit or choose to hire a property manager and pay a management fee (convenience fee) to not deal with tenants.  You still have to manage the property manager and in my experience this is more work than managing my property.  Most of the forms and information can be acquired by joining your local landlord association usually between $50-$100 a year.  High turnover areas, college towns, vacation rentals I can see dealing with a property manager.  Most of my tenants are 5 plus years, some have been at units over 20 years (love that).  Stay a little under market rents but no turnover expense. 

    The only units that I pay the water on are the units that have a combined meter.  One water meter for 2-4 units.  You adjust the rents accordingly and hopefully cover your expenses at the end of the year.   Yes you are ultimately responsible for the water bill but you are anyway if you pay it.  If they bill the tenant directly it helps build their credit (that's how I sell it) and they can control how much they want to use.  If they want to wash their car or take long showers, that's up to them.  You still get a copy of the bill and any notices if bill is not paid.  An "unpaid" water bill for $80 and a notice of "shut off" in 3 days  is a good reason for me to call the tenant and find out if they have paid the bill.  They are surprised that I know they haven't paid the water bill.  It is a red flag to know if I am going to get my rent, but 98% of the time it is paid within 24-48 hours of me calling tenant.    

    1Reply
  • Chris V.
    OP
    Investor · West Columbia, SC · Member since 2017 · 46 posts · 13 votes
    9y

    @Jim Costa  @Aaron Montague @Christopher J Lemmon

    Thank you kindly for your detailed responses. I made a low enough offer that the owner did not counter, simply saying "I don't think it's going to work for us this time, Chris."

    I'm not too worried about it. I wasn't 100% sold on it, and of the folks I've asked, about 50% said go for it, and 50% said walk away. 

    @Jim Costa, man our property taxes are KILLER. I don't understand it. How do people make money here?!

    Trash is $97 every two months for that duplex, according to the owner.

    I do want to manage my own properties at first so that I can learn what it takes and know if a PM is BS'ng me in the future. And maybe I'll be good at it, and keep doing it. However, I'll probably include PM fees in my calculations so that I have the ability to disappear without having it hurt too bad.

    I'm thinking I'm going to have to find a good real estate agent in the area who knows our area and knows where good rents can be made. Trying to do this myself is just not working...I don't think. We've driven like 50 neighborhoods in our area, and there are barely any MFHs, maybe a hand full.

    I can't get over the detailed advice you guys have given me. I sincerely appreciate it. Let me know if you have computer questions for me! :)

    1Reply
  • Francisco Hernandez
    Sacramento, CA · Member since 2017 · 25 posts · 7 votes
    9y

    @Chris V. Thanks for this post.  In reading through your post and all the comments from @Jim Costa @Aaron Montague, I just realized that wanting to start investing in rentals is way different than actually doing it and coming away with a profit.  Would you gents be able to help me get started on how to actually get started in investing in rentals?  Calculators, assumption models, etc?  Appreciate any help in advance!

    0Reply
  • Jim Costa
    Investor · Washougal, WA · Member since 2016 · 86 posts · 52 votes
    9y

    @Francisco Hernandez That is what Bigger Pockets is for.  Give you some ideas and what to look for.   There are so many niches for investing in real estate.  You have to read what people are doing and look for those that our successful in it.  Then you have to determine what is best for you.  Do you want to buy single family, multi family, buy and hold or flip.  What is your comfort area and how much do you want to be involved.  I lived in Sacramento area so a little familiar.  Not as crazy as the Bay area but still a high hot market.  

    I read your profile.  Not to much information.  Bought first house and looks like recently sold it.  If you have a little bit of money I would hang on to it.  Cash is king.  IF you have cash you can make things happen.  I always would recommend for people starting out to buy an owner occupy 1-4 unit complex.  If you can find a duplex or triplex or 4 plex that you would like to live in, take advantage of the owner occupy financing.  Buy with as little as 3% down get great rates and have a property that you can manage.  

    I haven't been in Sacramento for many years so I don't know your market.  But work with a mortgage broker and get prequalified so you are ready to move when you find something.  I noticed you can get a 2 Bedroom duplex in Citrus Heights for about $350K.   3% down is about 10K  your principle and Interest will be about $1700 +$300 for taxes and insurance.  Your payment is about $2000.  IF you can rent for $1200-1300 you can live in the other side for $700 a month.  This is what is now called house hacking.  Get a room mate for $500-$600  and you practically live for free.   This is just one example.  Again,  I don't know your area or numbers.  Familiarize yourself with local rents and areas.  Look at the good school districts if you are going to rent to families.  Look by the hospitals if you are going to rent to elderly.   Know the market and know your numbers so you can tell a good deal when you see it.  Good luck.  When you think you found something post for some help evaluating.

    1Reply
  • Francisco Hernandez
    Sacramento, CA · Member since 2017 · 25 posts · 7 votes
    9y

    @Jim Costa sorry for the lack of information on my profile.  I went ahead and updated that.  Also, Sacramento is a hot market right now, hence the reason I sold :).  I would like to PM you and get your take on a couple of investments in Puerto Rico if you don't mind.  Please let me know.  Thanks for the knowledge imparted already.

    @Chris V. Sorry for hijacking your thread. :)

    0Reply
  • Antoine Brown
    Merrillville, IN · Member since 2017 · 23 posts · 2 votes
    9y
    This is some good information. Me as a first time investor that hasn't pulled the trigger yet Bc trying to get all the knowledge I can BP partnership has been great. I would mind connecting with all you guys! Chris V. Jim Costa Aaron Montague
    0Reply
  • Jim Costa
    Investor · Washougal, WA · Member since 2016 · 86 posts · 52 votes
    9y

    Sure feel free to PM me and send me the information.   I am very comfortable in my area of expertise 1-4 units buy and hold, all aspects from evaluating to financing and increasing value.  I know very little about flipping and buying property in another country.  I can hopefully share some universal information and that will help guide you to more information. 

    1Reply
  • Account Closed
    Portland, OR · Member since 2017 · 12 posts · 6 votes
    9y

    @Aaron Montague great information and analyzing, really helpful information with analyzing a deal. 

    @Jim Costa as well, I really like your analyzing and information, reading you an Aaron going back and fourth and discussing the property is a lot of great information. 

    1Reply
  • Gordon CuffePro Member
    Investor · Roseville, CA · Member since 2009 · 1k+ posts · 584 votes
    9y

    @Francisco Hernandez if your looking for cash flow and a good economy , you should check out the Kansas City market. You can find a 65k house that rents for 850 per month. 

    0Reply
  • Jim Costa
    Investor · Washougal, WA · Member since 2016 · 86 posts · 52 votes
    8y

    @Francisco Hernandez Just wanted to check in and see how the Puerto Rico thing is working out?  How was your potential investments and the recent hurricanes affect your options.  Curios for updates

    0Reply
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