[Calc Review] Help me analyze this deal

[Michael Temple]

View report

*This link comes directly from our calculators, based on information input by the member who posted

I have a potential deal on a duplex. On the surface, it seems like an OK deal, not great. I am trying to get some opinions on if it is worth pursuing. This belongs to a friend of mine and he doesn't have it listed. They own it outright with no mortgage. I thought it would be a great potential seller-financed deal, but they weren't interested in that or at least not what I initially put together. So now I am trying to look at it as just an outright purchase even though it isn't discounted in any way.

Pros

1. Great condition and is fully rented at $700 per unit (total $1,400 per month)

2. Well maintained. New windows, newer roof, brick exterior, etc. My capital expenditures would probably be minimal for a while.

3. Easy to rent and manage. Current tenants are good, but possibly paying a little bit below market rent.

4. Nice area near a large hospital, which offers great employment and potential future tenants who are employees.

5. If I purchase now I would get a pretty low 30 year fixed mortgage rate.

Cons

1. Full price with no discounts from other listed properties.

2. No way to create forced appreciation. I would pretty much be buying a turn-key investment.

X-Factor

*Maybe* I could interest them in taking the down payment (15%) as seller financing in second position and mortgage the balance thus putting me into the property for very little cash outlay, but this is a big IF since they weren't interested in my previous seller-financed offer.

I am trying to figure out if I should just do this and get into the property and start building equity even though it isn't a killer deal or keep looking for something where I can create more of a BRRRR type deal or buy at a discount. The monthly cash flow (using the BP calculator) isn't great, but I also don't need the money so I could just plow it back into the mortgage and keep paying it down. I am not looking for real cash flow for about 13-15 years (retirement).

[Brandon Roof]

A few things that I takeaway form the analysis:

- I'm not sure if you've already locked in your mortgage rate.  If not, a 30 year at 4% may be difficult to find and obtain.  A 15 year 4% may be feasible, but if you are looking for 30, I would plan for something between 4.5% - 5.75% depending on the lender.

- Despite having good, established tenants, I would expect vacancy to be higher in the long run.  Many people use 5% while others like to account for one vacant month a year, which puts you in the 8 % - 9% range.

- Even though capex and repairs should remain low for now, this report shows a 30 year projection.  You will likely need to bump those items to at least 7% each, if not higher if you'd like to create an additional buffer.

- Your grown assumptions are probably a little too optimistic.  Expenses at 2% and property value at 3% should be within a percentage point or two of being accurate, but income at 5% will be difficult to pull off unless you have a sizable increase or two at some point, which may be feasible as you mentioned this may be below market rent.  Without a large jump, I think it's going to be very difficult to retain a $700 tenant when there rent will be pushing $900 in five years and $1,150 in 10.  Short of them being promoted or changing careers, they will definitely be moving.

If you take any of these changes into account, I'm guessing the deal will look significantly less attractive.  That being said, I'm not very familiar with the Toledo market so that doesn't necessarily mean it will become a bad deal, though I'd like to think there would be something better than this in your area.