Duplex in Cleveland Ohio

[David K.]

Hi,

I found a duplex outside of Cleveland Ohio that I was hoping to get some feedback on. I am a long-time lurker in investment properties, but have never pulled the trigger. I found a property recently that seems too good to be true (or just undervalued) and wanted to get some feedback from those more knowledgeable:

PURCHASE INFO:

Purchase price: $55,000

Financing: 20% down ($11k) with rest ($44k) financed at 4% over 30 years.

EXPENSES:

Mortgage: $2,573 annually

Insurance: $900 annually

Property taxes: $2,750 annually

Misc. Expenses: $4,200 (assuming 25% of Gross Income)

Vacancy: $1,800 (assuming 10% of Gross Income)

Total Annual Expenses: $12,103

INCOME AND RETURN:

Rent: $1,400 / month (2 units; 1st at $800 and 2nd at $600 / month)

Annual Gross Income: $16,800

NOI: $7,150 annually

Cash Flow: $4,577 annually

Cap Rate: 13%

COC Return: 41%

Notes: The property is in a very blue collar area; not terrible, but certainly not a good area either. Significantly, the owner is about 6k delinquent in local taxes. I suspect this is negotiable on how this will be paid / impact purchase price, but frankly even if I paid off the delinquency entirely (and calculate it as part of purchase price), CAP rate is still 11% and COC Return is still like 35%.

The current owner purchased the home out of foreclosure for half the current asking price, and the current asking price is under the county appraised value (not that that means much). Home seems well maintained from what I’ve seen (so far, of course). The bigger unit is rented and the smaller unit is occupied by the owner. I believe the owner is financially hard-pressed (hence the tax delinquency), so that could explain the desire to unload the property. But it has been on the market for 6 months, so something seems off. 

My initial guess is that the tax delinquency is scaring other investors off, but as stated above, the numbers work even the buyer pays it off. Is there something I’m missing? New furnaces and water tanks were installed in 2013, which incidentally coincides with when the owner began to get delinquent. But no other information is currently known about possible cap ex—frankly, the current returns seems to give plenty of wriggle room even if there are immediate cap exs that are necessary.

Thoughts appreciated. (And Happy New Year to all!)