Milwaukee Duplex Analysis

[Jesse Curtis]

Hi, First time buyer of a rental property and this is my first run at the numbers for a duplex. 

Property is a 2/2 Duplex (1 bath) with a 2 car garage. Currently occupied. Rents and taxes are actual. Asking price is 145,000.

I know a 100%/mo. per unit cash flow is a common goal I see, is that number calculated before taxes?

Any advice or things that look out of the ordinary would be appreciated.

[Pat Parrillo]

This seems to be a good analysis, Jesse. Some items I would explore further are as follows. 

First, when doing your due diligence always use actuals - not pro-formas or any estimates provided by the seller. Those can serve as a benchmark or starting point but make sure to run your own numbers. For example, I see it has projected rents listed. I'd recommend confirming what the actual rents are currently as when you purchase the property you will need to honor the existing leases until the leases expire. So if you have the potential to raise the rents by $100 a unit just know unless they're month to month it may be some time before you can do so. A great resource is rentometer.com to identify what fair market rent would be. There's no better time to raise rents than when you first buy a property and leases expire. The Tenants expect you to raise rents - so good time to do so depending on where the rents currently are. 

Vacancy: Typical underwriting is about 5%. If you really want to play it safe you can use 8% as that would represent each unit being vacant for one month. However, in Milwaukee I believe vacancy is at about 3% - which I could be mistaken. Ultimately, Milwaukee is an easy market to fill vacancies in with the caveat of winter move outs. 

Repairs and Maintenance: To play it safe 10% gross income. You'll find some years you won't come close to this figure but then there will be years that a furnace or maybe two go down and repairs and maintenance sky rockets. 10% is a conservative figure to play it safe. On those years with no large Capital Expenses then it's just gravy. I do see you have a CapEx number in your evaluation so between that and repairs and maintenance looks close to that 10% number.

Utilities: I'm not sure if you're considering water/sewer at utilities. If so, you can ignore the statement below.  However, if utilities means electric and heat depending on where you're properties are located and your tenant base you can pass those costs off to the tenant and have them pay for the utilities as they're typically separately metered. I'd recommend doing so if possible. 

Water/Sewer: I didn't see a line item for water and sewer. It's rare to find duplexes that are individually metered for water and sewer which means you'll need to pay for that. I've seen average bills for water/sewer to be about $45 a month  per unit. So that's an additional $1,080 in expenses unaccounted for. Also, once you own the property and begin receiving the water bills every quarter keep an eye out for any spikes in usage. A leaking toilet can cost you close to $500 in a year. You'll want to get on that right away. The city has a website where you can compare the water usage to historical averages for the property so you'll know quickly if there's a leak or issue. 

Lawn/Grounds Keeping: Similar to Utilities if you do have a lawn that needs to be mowed. Give the tenant a break on rent and have them mow it. Also, if there are sidewalks those will have to be shoveled in the winter. Another item to put in your lease that the tenant is responsible for shoveling the snow. 

So based on your numbers (keeping everything as is and saying utilities is water/sewer and tenants pay for heat and electric)  you're showing $3,217 return on a $33,750 investment which is a 9.5% return I'd say that's a fair deal. I personally have a hard fast rule that I'm looking for a minimum of 10% Cash on Cash return as one of my criteria and this gets it pretty darn close. Including principal paydown you're closer to 15% return, looks good. If you have the opportunity to raise rents based on what you find on rentometer as soon as the leases expire the deal only gets sweeter. 

Good job on the evaluation and looks like a good deal in my opinion. As you proceed feel free to reach out if you have questions, happy to help any time.