Can this duplex be a good deal?

Question

This would be my first deal and I want to make sure I don't rush in and I have the numbers right. It is seller financed and the house price and interest rate can be negotiated. Each apartment goes for $700 a month and the tenets pay all utilities and law and snow removal. All the big ticket items were just replaced in the past 5 years. And it is in a good location for the town it is in. Here are the numbers:

Am I missing any expenses and is there a way to make this a good deal like lowering the cost of the house or interest rate?

Am I missing any expenses and is there a way to make this a good deal like lowering the cost of the house or interest rate?

Christopher Giannino · Answer

@Logan Graham

I would say that you hit pretty much all the major expenses but there still might be some other expenses that you would eventually incur such as accounting/legal expenses, etc.  Just as a side note, PM seems a little low but it could be in line for your area.  The first red flag about this "deal" is that you're losing money every month and not actually cash flowing.  Yes, I understand it's only $11.55 but that can easily change...  taxes will go up, insurance probably will eventually go up, etc.

Now with that being said, the 1st thing I noticed is that your mortgage expense seems to be for a 15 year term.  If you negotiated to extend that to a 30 year term then you would see about $140 more per month (given the same 63,000 and 7.5%)  \which would now automatically put you in the green.  Another thing you could look to do is negotiate the interest rate or purchase price down which again would increase some more cash flow.  Maybe $700/month in rent could be increased to $750 or $800.  These are all some things that could then make this potentially work.

At the end of the day, I just want to say you should never force something to work and remember numbers don't lie.  I'm not experienced or an expert but I just want to share that it took me about 2 years before I finally bought a property.  I didn't wait because I was afraid to commit or had analysis paralysis, I waited because I couldn't find the right deal.   Best of luck and let me know if you have any other questions.

Cara Lonsdale · Answer

Looks like you have a good start here.

Some things that I see....

TOTALLY cosmetic, but worth mentioning is that you should always figure vacancy right under income.  Because in true NOI models, vacancy is first taken away to create the Net Income, THEN all the expenses are calculated.  Again, in your calculations above, it doesn't matter, but when you get into more finite calculations, you will want a more accurate picture of what exenses are, and what part the vacancy plays as a deduction from the income.

Your PM is low.  So double check that 7% can be achieved for your area.  10% is the norm.  And even if you have negotiated with a PM to 7%, if you figure 10% in your calculations, then if you ever have to fire your current PM, and go to one that charges 10%, you won't see that bumb in expenses if you have already figured for it.

Your Vacancy seems high at 8%, but that is OK.  Just know that if you put good strategies in place for leasing up, then you should always be able to beat that 8%.  Think about having the last 30 days of a lease be a showing period for prospective tenants.  Write it into all of your leases that they agree to allow showings the last 30 days, and will keep the place clean for the showings.  The goal is to already have it rented by the time your old tenant moves out.

If tenants pay all utilities, why is there a garbage expense?  Is this included in the water/sewer/trash expense?  In AZ, it is all one fee, so this is why I am asking.

Do you have a home warranty on the property?  People have mixed feelings about these, but if this is your first property, you may want to consider one.  I use  (and love) Old Republic Home Protection (orhp.com)  I have also used American Home Shield (ahs.com) and they were okay.  I have also heard good things about Fidelity.  It will cost you $65-$75 per trade call, but well worth it to have major items covered.  It is just one more layer of insurance to help balance expenses.  A warranty can cost $335+ annually.  Think about it (and maybe go on the websites and read about what they cover and don't cover and weigh the options).

Regarding the mortgage payment, did you calculate that payment as a PITI or just PI?  If you calculated it as a PITI, then you can remove taxes and insurance from your expenses because they are already calculated in your payment (PITI = Principal, Interest, Taxes, Insurance).

IF your mortgage payment is just PI, then I assume that your strategy is to be done paying with this property sooner, rather than maximizing cash flow now?  That is okay as long as you have a plan for paying the negative cash flow each month.  Also, keep in mind that negative cash flowing properties work against you with a traditional lender.  It will make it harder to qualify for your next properties if you acquire too many of these negative properties as their losses are deducted from the personal income you can use to qualify.  So, keep that in mind.  Many BPers will tell you that cash flow is the only thing that matters, but that is really only accurate to those seeking cash flow NOW.  Others may be okay with no cash flow if the trade off is having a property free and clear in a few years (or at least sooner than a 30 year term).  So, whatever your goal, just know the pros and cons of your choice.

Best of luck to you!

David Zheng · Answer

Ok if you are getting this house 100% funded, I would jump on it asap. That $11 a month can quickly go away by increasing rents 2-5% every year.

Brian Garrett · Answer

Great information provided by @Cara Lonsdale

Franklin Romine · Answer

I would buy it.

Can this duplex be a good deal?

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