Deal check for buy and hold duplex

[David Desousa]

Details:

Property is a Duplex in Wisconsin, each unit is a 2 bed 1 bath

Asking price $48K, would be paying cash

Comparable rents in the area in similar duplexes via rentometer and craigslist: $700-800/month

Costs considered:

Rehab @ $15k (probably way off, I'm still learning) - some new flooring, cabinets and doors as far as I can tell currently.

Property tax @ $900/year

Insurance estimated @ $1200 for year

10 percent vacancy rate

10 percent property manager fees

10 percent of rent saved for maintenance

5 percent of rent saved for capital expenditures

3% of price for purchase related costs (inspection/title fees/transfer taxes etc)

Calculations:

Cap rate (purchase price): 18.9%

Cap rate (market value): 13.8%

Cash on Cash Return: 14.4%

Cash flow @ $749 ($375/unit) or $562 after income taxes

ROE: 13.4%

Rent to value: 2.9%

Please punch holes in this for me so I can continue to learn, I appreciate the knowledge here.

[Michael Reach]

@David Desousa,

I'm going to disagree with the idea of leveraging into a more expensive "better" property mentioned above. I think the reason you are looking at such good cash flow is because it is a lower end property. That said, leverage is definitely your friend for returns. I don't believe you mentioned an expected after repair value. If the property after repair will be valued highly enough to qualify for conventional financing that would almost certainly improve what seems to me to be insufficient cash on cash return.

If the ARV will be North of $100k, then I think this sounds like a deal but you should put down 25% of the total project costs, get hard money for the remainder of purchase and the rehab (keeping your money in reserve for budget overruns), rehab, improve rent and tenant quality and then refinance out of the HML into a conventional loan. This assumes you can personally qualify credit-wise but using the proven rents as income. The HML would need to be long enough to give time for turning over tenants and performing interior rehab at end of current leases.

I think if you run the numbers on that you'd have smaller but still respectable cash flow but much better ROI, especially if it appreciates in the coming years and you then sell.

On the other hand, I'm still a rank newbie myself. So follow my advice with caution.