First deal (duplex), looks good I think - thoughts?

Question

Just viewed this property today, seems like it could be a good first investment property.

The property is currently unoccupied, advertised as 1295/unit, I used 1200 to hedge a little.  It is listed for sale at 199k, I used 190k, on market 60 days.  Property is in great shape overall, easily move-in condition.  I'm told that there's a housing shortage in NH and the overall statewide vacancy rate is less the 1%, and this place should rent easily.  Heat, water and sewer included.  No foreseeable capital expenses in the near future, it's really a nice property.

The (maybe) bad: the town it's in has gotten a pretty bad rep for awhile, although things appear to be turning around.  Certain areas are on the up and up, this property is in a better residential area, and you can see there's improvement happening in the downtown nearby, with more planned in the next couple years.  Rents have been on the rise, but 1200 (never mind 1295) would definitely be close to top dollar here.

What makes the numbers most workable is to self-manage, which is where I'm hesitant...I always foresaw paying a management company, but that dips too far into the monthly cash flow to make it viable.

Any thoughts?  Maybe it'd be worth this property to learn how to be a landlord?

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

Ann Bellamy · Answer

I've learned a lot from investing over the last 20+ years:

• There is a reason that towns get a bad rep, and that is the tenant base.  Franklin has a tough tenant base.  Tough tenants cost a lot more than good tenants.
• When the economy cycles, the tough towns are the last ones to rent.
• Don't look at advertised rents when the property isn't rented at that amount.  Do your own research.  Franklin specific advice has already been provided relating to the upper end of the rents.
• Tough tenants open the windows in the winter and crank up the heat at the same time
• Separating the utilities is a good value add, but may not work if the market won't support it, as tenants will avoid your units if they don't want to be responsible for their own actions.

These are just some of my lessons learned over the last 25 years. I would not consider buying a property in Franklin at this price. The experienced investors in NH won't pay anywhere near that for a property in Franklin. If you buy it, you will become experienced, but the experience won't be a good one.

Erik W. · Answer

Nothing about this deal really excites me.

You're paying $47,500 out of pocket to buy yourself a job as a PM and stringing the note out for 30 years.  Some folks do that as large apartment managers because the overall cash flow is substantial and there is tremendous potential upside for forced equity as rents rise and you find cheaper ways to manage the operating costs.  But for a duplex it gets kind of depressing self-managing after 5 years and netting only a few thousand per year for your troubles.

Growth/expansion is another concern.  If this property is ready to go as is and already renting close to the top rent for the area, there's no where to go as far as increasing value, which means the only way you refi and get your money back to do the next deal is thru waiting for values to increase naturally along with the market since your loan amortization will be inconsequential the first 5 years or so.

What do you want to do?  What has you excited about this deal?  "It's my first deal" doesn't count....

Troy Zsofka · Answer

@Audrius Pauliukonis -

All of the advice you have received has been solid. Allow me to expound on a few as a current owner of a duplex in Franklin:

-Management: It's fine if you want to self-manage. It will give you experience and allow you to realize a better cash flow. However, that choice should be made for those reasons, not to make a bad deal pass muster. In other words, you should self manage so that you make more money, not so that the seller of the property gets to because you used self-managing as a way to justify overpaying.

-Rent/Occupancy: Left vacant for showings? Then why is it listed for rent? Do a Craigslist rent CMA. I think even $1,200 is possibly pushing it. Maybe not with utilities included, but it's been listed for 5 weeks. That's well beyond the time it takes to indicate that the rent is too high or the property needs improvement (of course it's a sliding scale and the 2 are interdependent).

-Location: Great to hear someone say that Franklin is showing signs of progress. We have the duplex there and another in neighboring Northfield. I wouldn't consider myself a market "expert" in Franklin. However, anecdotally, when renovating our duplex there, one of our employees who grew up in neighboring Andover made a comment that we bought in a good neighborhood, and to make sure not to touch anything on the Bow St. side of Central; which is definitely where your prospective property is located. Is Park St. east enough of Bow to be okay, or do the drug issues reach there too? That I do not know.

Anyway, I wouldn't touch that property unless I walked the neighborhood at 1am and no one offered to sell me H or meth, the seller provided me with a stack of good rental apps generated from the current lease listing (or good tenants already in place), and the price was lower. Well, I guess I wouldn't anyway because I don't do included utilities on duplexes.If you're interested in a Franklin duplex, I can offer ours at a much better price than Park St. It appraised this fall for $191,000 but we'd take a good bit under that. It's at Orchard/Elm and in much better condition than your prospect. Both units are 2br/1bth, side-by-side, separate driveways. Tenants pay heat & electric and take care of snow and lawn. Both tenants work full-time and have never missed rent. Tenant 1 is at $900 since April 2017. Tenant 2 at $1,000 since May 2018. Both are probably due for a rent bump this spring depending what the comps say, but I believe in keeping rents $50 under market to attract and retain high-quality, long-term tenants; so I wouldn't bump them up more than $75-100 max. W/S was $1,289.43 last year. Insurance $764.00. RE Taxes are currently $4,489.51, and apparently due for an abatement; especially after seeing the tax card on your Park St. prospect assessed at 48% what ours is ($96,300/$199,800). No doubt our property is worth more, but if that's not ammo for an abatement, I don't know what is. As far as other expenses, those are up to you for pro forma assumptions for R&M and CapEx, but I'm not sure why you have garbage in there; Franklin has *free* curbside service, at least at this location ("free" as in already paid for through our RE taxes).

We also have the one in Northfield that we'd be willing to sell. It's a 3/2 house with a 2/1 above the garage, so a bit different than the typical duplex, but the same in regards to tenant utility and maintenance responsibility. However, it's worth a good deal more, and would probably be more ideal for a house-hacker who wants the in-law apt to subsidize their housing expense.

Feel free to reach out if you'd like to talk further about these, or just in general about investing in NH. Happy to help where I can.

Happy investing,

Troy

Tucker McCarthy · Answer

Hi @Audrius Pauliukonis , I'm curious as to what Town you're in. I wouldn't think it would be hard to find renters in the lakes region. The fact that it's vacant is great for buying, much better than inheriting tenants. You might have to be patient and wait a bit for good tenants, but ask @Chris R. who just did a rehab on a 3 family in a Town pretty near to the lakes region that hasn't always been known for the greatest location, he has great tenants at great rates, just had to be patient and wait for some good ones to come along.

Audrius Pauliukonis · Answer

@J Tessier I know what you mean, but being new to this, I'm still figuring this out - which is why being able to put up a report on this forum is such a great opportunity, to get honest and realistic feedback from people who know a LOT more than me before making the big commitment!

I don't think even I'd describe Franklin as "up and coming", but there are signs of life down there that weren't there a few years back, which was surprising (to me) and nice to see.  I've heard the talk about Franklin, but never before through the lens of a potential investor's perspective...still trying to figure out what areas in the state offer good opportunities for a green investor like me...not that there's no opportunity there, but the consensus seems to be that Franklin might not be the best place to start off my REI endeavors, haha.  But, now I know more about it going forward.

I appreciate the thoughts on a town's development timeline, to get a sense of it over time, and to take that into account.  I remember what the mills were like in Manchester back in the late 80s when I was a kid, things look different today for sure, but it took awhile.  Lived in Boston's South End for a year in 2000, and that development was happening on a much faster scale...

Joshua Tessier · Answer

I found it interesting to here you describe Franklin as up and coming. I struggle to describe parts of Manchester as up and coming and geographically Manchester is a whole lot closer to more opportunities than Franklin.

You have to keep in mind Franklin got the nickname Skankland for a reason and to change people’s mind will take decades just look at Manchester. It has taken +30 years to develop Manchester from a deserted Milltown to something with a moderately desirable economic engine behind it. At $100k per unit your paying Manchester market rate prices 40 miles north. With all that said personally I’d pass and let the next guy take a chance at those numbers.

Audrius Pauliukonis · Answer

Again, thanks to everyone who commented, especially for the area-specific info @Ann Bellamy and @Troy Zsofka.  It's been super helpful to get feedback like this - even though I'm sure there are good and bad tenants in any market, with regard to Ann's point about gaining "experience", of course I'd really like to minimize the risk of that sort of experience!  I'm certainly seeing the truth in the statement that 99% of deals aren't good deals, for one reason or another, even if they may seem so on the surface.

I think for now I'm going to go back to the drawing board and re-evaluate my approach.  I'm bound and determined to get the ball rolling with a property, ideally within the next couple months, just want to do what I can to start out with the best chance of success.

As a side note, Ann, I really enjoyed and got a lot out of your hard money discussion with the NHREI mastermind group in Derry a week or so ago!

Thanks again,

Audi

Michael Noto · Answer

The two biggest negatives I see is an area that will not attract a quality tenant base no matter how nice your apartments are and the fact that the owner is paying for heat. Both are big risks and present unknowns that I think makes this deal not worth pursuing.

Joe Villeneuve · Answer

You draw the line where the $$$ goes negative.  Poor cash flow, even if positive, might just as well be negative

First deal (duplex), looks good I think - thoughts?

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