Is this $420K duplex too expensive? (Sacramento, CA)

[Cody Kitaura]

Hi all, I'm looking at my first potential duplex and I'm having a hard time figuring out how to estimate some of the costs. This is in Sacramento, CA, so I think a lot of the costs will be pretty high compared to other posts I see on here, examples in the books, etc.

• List price: $420K
• Year built: 1950
• Time on market: 40+ days
• Repairs needed: New roof, according to current owner (it looked OK when we walked through, but I've budgeted $10k for it?)
• Recent capex: Both HVAC 5 years old, water heaters 4 years old
• Unit one: 964 sq ft, vacant, market rent $1500 (I saw an identical house down the street with a "for rent" sign at $1575)
• Unit two: 964 sq ft, rented, $1250
• Property taxes: $5,500 / yr

The seller seems antsy to sell (the owner is a realtor and apparently emailed our realtor twice yesterday asking if we're interested), so I'm targeting $400K, with 20% down.

The current owner provided these numbers:

• Annual operating expenses: $6,000
• Annual utilities: $4,000
• Annual insurance: $600

When I use DealCheck, sometimes it has positive cashflow and sometimes it doesn't, depending on what I put for vacancy, capex, maintenance, etc. I would definitely need landscaping (big front lawn and several small trees), so I've put that as $100/mo.

It definitely doesn't meet the criteria of things like the 70% rule or 1% rule, but I don't know how realistic those are in Northern California. The price is similar to others comps in the area.

Thanks in advance!

[Erik Mihlsten]

Couple of thoughts! First...congrats on your first potential duplex! That is quite exciting. I have property in LA so I might be able to relate on the expenses front, Although, I think I prefer Sacramento pricing to LA pricing. Are you planning to buy and hold? 

A new roof budget of 10K is a solid estimate. I don't think you'll need to worry about the HVAC or Water Heater at this point, but that is all something a good inspection will be able to help you decide. Always try to find the most detail oriented descriptive inspector you can to absolutely tear apart a property. 

Not sure if you've talked to a lender yet, but for investment properties lately, they have been pushing more of a 25% down as opposed to 20% down. So you might want to verify you can get away with putting 20% down. 

Expenses kind of depend on the state of the property. We renovated our properties in LA and since the renovations, our expenses are nominal. This is great for 2 reasons...low expenses (duh) and we can demand higher rent since they are in great condition. Last year for one of our triplexes we spent a grand total of $200 in maintenance and repairs, which is about 2%. You are lucky one of the units is vacant. It'll give you an opportunity to fix anything red flagged by your inspector. Tenants pay for utilities (which you should definitely try to pass onto them). 

You know the area so you can estimate vacancy a bit. We have 6 doors in the LA area. One triplex we have had for 5 years and during that time we have had not a single vacancy. The other triplex we have had one vacancy for 1 month in 3 years. I still try to be smart and hopefully the other units can cover (most of) the mortgage if a unit does go vacant. 100 a month is a good number for lawn care. We pay 70 a month.

Nothing I have ever bought in LA (or elsewhere) has ever met the 1% rule or 2%, but every purchase I have made has had positive cashflow from day 1. Ex. SFR in SLC mortgage is $1212 + expenses (insurance, taxes - everything else is passed on to tenant, utilities, lawn care which i wrote into their lease as their responsibility to maintain) $200 and rent is $2400. Doesn't pass the 1% rule but i'm perfectly ok with the margin on this.

I will say, although I have been lucky with low vacancy and expenses, I am always very conservative in my calculations and err on the side of caution. Not something I want to cut close or play games with. The property you are looking at seems like a decent opportunity. Mortgage would be around 1350 a month + 60 insurance + 460 taxes + 200 misc. expenses brings you to $2070 and you are looking at a potential income of 2825 (and possibly more if you bring the other unit up to market rent or even just slightly increase the rent). That gives you a positive cashflow of almost $800. Not bad.

Happy to chat more if you want! Good luck!