Is this duplex is a good deal or not.

[Daniel T]

Hey everybody. I am new to the community and REI. There is a wealth of information here and some very knowledgable people, so I am looking for some advice on a potential deal.

I will be financing it with an FHA loan, 30 years, fixed rate, between 3.5% - 4%.

Purchase Price: $160,000
Percent Down: 3.5% ($5,600)
Loan Principal: $154,400
Asked seller to contribute $8k towards closing costs.

Currently both units are vacant, but I will be living on one side while renting out the other. I plan on living there for a year and then purchasing another investment property ~1 year later.

month/year

Rent: $1,900/$22,800 (Broke said I could ~$900/$950 for each side)
Less Vacancy (5%): $95/$1,140
EGI: $1,805/$$21,660

Taxes: $291/$3,488
Mortgage Insurance: $161/$1,930
Hazard Insurance: $193/$2,316
Maintenance: $100/$1,200
Utilities: tenant pays

Total Operating Expenses: $745/$8,934

NOI: $1,061/$12,726

Less Debt Service: $719/$8,633

Cash Flow: $341/$4,093

Cash on Cash Return: 6%/73%

Price Per Sq/Ft: $76.48
Cap Rate: 7.95%
DSCR: 1.47

I would like a larger return on the monthly cash flow, but it is in a nice location. This duplex (2/1.5) is in a prime location, great area, right next to major roadways and shopping. Has fairly new appliances that are in good condition, new carpet in the bedrooms. Doesn't need any major work, just some landscaping, some paining, a few small things need to be replaced. Some people in the same zip are paying $1100/$1200 for a similar place. I figure once I do some work and fix things up I can charge more down the road.

Is this deal worth it or If I am missing something in my calculations. There are a lot more knowledgeable people here than I with a lot more experience. I would really appreciate any feedback that might steer me in the right direction. I want to have a successful career in real estate, but don't want to blunder my first deal.

Thanks

[David Beard]

Nice analysis, well thought out.

1,200/ yr is OK for just maint, but insufficient to build capital reserves to pay for roof/mechanicals replacement, and make-ready expenses when the unit turns over. I usually assume at least 10% (and at least 15% for properties a bit older) of gross potential rent for maint and reserves.

It's generally recommended that you assume 12-14% for property management (8%/mth plus 1/2 mth at each turn), even if you're self managing. Not only is your time worth something, but you just don't know what might happen down the road that might prevent you from managing this property: owning too many units, job relocation, etc. Much better to at least build it in on the front end.

5% vacancy assumes each tenant stays almost two years. This is pretty aggressive most places, but with very high demand and turning the unit very fast, you might be able to hit that mark. Most would use 8% (1 turn per year w/ one mth's vacancy between turns).

Is water metered separately for the two units? Don't take the broker's word for what the rent will fetch. Make sure you have good comps. You note some higher comps, which is comforting, but check it out thoroughly on Craigs List, Padmapper, calling For Rent signs, talking to nearby tenants in similar properties, etc.

Build in any expected rehab expenses when computing your cap rate and ROI. The $8K of closing costs is also intended to cover the up front MIP, I assume, so that your 3.5% down payment would be all you'd need to close (plus escrow account prepays). I assume you've verified the FHA rules, and the seller is permitted to contribute 5% to closing costs.

It's a skinny deal as a staight rental. Since you're only planning to live there one year, you're buying it more as a rental than a long term residence. What are the nearby and recent comps for similar properties? What was the peak tax assessment of the past five years? (Would be nice to see that number at twice what you're paying, given that S. Florida was hit pretty hard.).

Why are both sides currently vacant?