1/2 of a Duplex in Tulsa - Deal or No Deal?

Question

I'm lookiong to get some more seasoned eyes on my analysis and feedback on points I may be missing or assumptions that may be off. This is my first investment property. The property is one side (half) of a duplex in Tulsa, Ok. It's a bank owned property and was an owner-occupied foreclosure. Most duplexes I've seen aren't owned separately, so that is interesting to me...

Here are the details:

1156 sq ft

2 bed/2 bath

Purchase price ~71,000 including closing costs

Needs $7-9,000 to get it rent ready, so we'll round up to an all in price of ~$80,000.

ARV ~$100,000 (I wonder about this as I imagine the demand isn't super high for half of a duplex...thoughts?)

The other side of the duplex is rented out for $800/month and I think this would be right around that price. Could probably get $850.

Assumptions:

Insurance $600 (I have a couple quotes at this number)

Leasing fee $595 (have a quote for this)

Management fee 10% monthly rent

Repairs 5% of PGI

CapEx 5% of PGI

Taxes $1,027 (last year)

Analysis

I've analyzed the deal with an all cash purchase and I would be looking at returns of about 6.8% CoC before tax and 5.5% CoC after tax.

However, if I were to finance the deal after repairs at 5% with a 75% LTV (i.e. pull out 75,000 of the 80,000 I put into it), my returns would bump up from a % standpoint, but the monthly CF would be pretty small (although at that point I would only have $5k invested).

What am I missing? What's the general thoughts out there on if this deal is worth it?(keywords: Tulsa Broken Arrow Owasso Oklahoma duplex)

Michael Slockers · Answer

@Ryan Faber

Sounds like you have your answer already, but you could probably find a better deal straight off MLS with no fix-its required. You may not get equity up front but it could be a better long-term investment both from an appreciation and a monthly cash-flow standpoint.

Kevin S. · Answer

@Ryan Faber if you leave $20k in the deal just to get your cash flow over the $100/month mark then you're just buying cashflow, which makes no sense. Also, regarding resale, from what I've seen half-duplexes tend to sit on the market for a while here, for the price someone would pay for a half duplex they could just as easily go get a detached SFH so not too many homebuyers are interested unless its pretty underpriced. And I'd second what @Todd Willhoite said about the risks related to the other side not taking care of their property and how that could negatively impact your ability to rent it out.

Anna Buffkin · Answer

I would also increase repair costs to closer to 15% for several reasons.  Firstly, repair costs tend to be higher in the first year as you find things wrong thst had previously been ignored.

Secondly, 1 property doesn't give you the benefit of spreading the risk.  I have 10 properties and ran a 13% repair expense ratio last year.  A couple of properties ran under 5% repair to rent ratios.  Most ran between 5 and 10.  1 ran 17% but I had to fix some damage after a move out.  My last property ran 70% before CAPX repair ratio! If it could break, it did. If I owned 25 units, my repair expense across my portfolio may have been able to better absorb the cost and be with the 5-10% bracket.   If I owned less, my expense ratio across the board would have been a higher percentage.  Fewer properties just make it harder to predict and budget repairs costs.

Finally, a small plumbing repair costs the same whether the rent is $800 or $8000 / month.  While I too invest in the low end of the market, repair costs as a percentage of rent are higher in lower rent areas both because the rent is lower and because generally the tenants don't take care of things as well.

Jaysen Medhurst · Answer

@Ryan Faber, I don't think this deal is worth it. Your projected expenses are a little low and with financing you're going to be below $50/month. Most investors like at least $150/month/door.

End of the day this doesn't even hit the 1% rule, so it's hard to make the numbers work.

Martin James · Answer

Oops. Hit the send button too quickly. Im an insurance adjuster and I had to adjust a roof claim on a duplex owned by two different people...Point is, you are buying into other peoples problems when you have a joined property.....It isnt like a condo where the association pays for everything on the outside, usually...And you need to hope they care as much as you do about your property. Also, Im always asked when I interview prospective tenants if I own both sides....A "No" answer would be a turn off for a good quality applicant, guaranteed..Good luck to you..

Ryan Faber · Answer

Thank you to everyone for your feedback. It's a no deal for me.

Martin James · Answer

Everything they said...

Justin Foster · Answer

@Ryan Faber Good call.  Don't have to look too hard to find better ones out there.

Rhett Tullis · Answer

i as a policy always avoid 1/2 duplex deals.

1/2 of a Duplex in Tulsa - Deal or No Deal?

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