Thinking about first duplex. How's it look?

Question

Hey, guys. So, I've been in search of my first multi-family and think I uncovered a gem, but I'm still new at running all the numbers so I was hoping to get more experienced eyes to take a look and see if I'm way off base, missing something, or if maybe I did find a genuinely good deal.

Here are the main details:

2,400 sq/ft brick duplex, 2b/1bath each unit, fully renovated, new hardwood throughout, tenants pay utilities, etc.

List price: $79,900
Expected purchase price: $72,000

Initial investment:

25% down: $18,000
Closing costs, inspection, etc.: $3,000
Improvements/Appliances: $5,000
Total cash outlay: $26,000

Annual expenses:

Property taxes: $750
Insurance: $700
Annual maintenance: $500
Advertising: $100
Property management: $1540
Mortgage: $3,283
10% vacancy: $1400

Rents:

Going rents in the area for similar properties of this square footage in the neighborhood range from around $700-$950/month. So, assuming both units rent for just $700, that's a gross rental income of $15,400.

Crunching the numbers, that gives a NOI of around $11,600. Less mortgage payments, and the net cash flow is around $8,350.

So, cash on cash ROI is about 32%?

That almost seems too good to me, so I'm wondering if I'm missing something. The most recent assessment puts it at around $85,000, which I don't doesn't mean much. But recent sales I could dig up show homes of similar size within a few blocks have sold for anywhere from $65k to $120k. In fact, a few homes are listed just a few houses down at between $134k and $190k. The only drawback, that I can see, is that it does not have air conditioning.

From what I could dig up, the owners are also owners of a custom cabinetry company, so I'm guessing they bought a fixer-upper, used their skills to finish the house nicely, and are now flipping it.

To give an idea of the quality of the rehab, I've included a few pictures. It looks very nice.

So, what do you think? Do my numbers make sense? Am I missing something obvious? Is it a decent deal?

Account Closed · Answer

Jeremy,

Based on my experience I would not buy a duplex, If I was going to buy a multi-unit building I would buy a four-plex because if there is a vacancy you can still cover your costs and possibly make a profit.

Also a two bedroom/one bath limits your prospects for the property, I would do no less than a three bedroom, two bath to better my chances of getting a tenant faster and a three bedroom traditionally will keep a tenant for a longer term.

In this market I focus on single family homes because I can get a great price and make a nice profit every month, but remember location, location, location.

Which means location, population and jobs, you buy real estate in those areas and you will always find success.

Now what about the creative financing to spend less out of pocket up front and get more rent every month...

Marv Rousselow

Ryan M. · Answer

Duplexes and 4 families are apples and oranges. Your class of tenant is different, tenant disputes, etc.

We have both. This my pet peeve with this site, people giving opinions that aren't actually doing it.

Steve Babiak · Answer

Tenants are used to using window units; just make sure that there is a receptacle for the window AC to plug into in the bedrooms and any other space where AC would be appropriate.  In TX, it would probably be a different story, but you're in MI ...

Jeremy Vohwinkle · Answer

Thanks, guys. These are exactly the kinds of things I wasn't really thinking of off the top of my head. I knew the A/C would be a concern, but as Joel Owens pointed out, there could be a lot of far more pressing concerns that have been covered up if it's older.

I'll have to go look at the place in person to get a better idea, and more importantly, look at some of the local rentals to assess the A/C situation. Up here, homes without A/C are very common, and in many places, the norm. And given the house doesn't have forced air to begin with, I don't think it would be worth putting in anyway. But if all the other places renting in this price point do have A/C, that could really change things.

Ryan M. · Answer

A/C is going to cost some coin as I see a rad. heaters.

Are there ducts in the house.

Elliot Mendoza · Answer

You could shop around your rental market and see what other places are offering for 700 a month.  No AC unit kind of threw me for a loop personally.

The numbers look good otherwise(it came to be 26% COC return from what i plugged in), but with no AC unit, will renters stay in your units? Will you have to pay for that out of your pocket to have installed and is there vents already in place, or do they have to be ran throughout the property also?

Or is your area fairly mild temperature wise all year round?

Joel Owens · Answer

Jeremy you are only projecting 25% annual expenses for your cash flow before debt service.

What I take issue with on these types of deals is terms like "recently renovated".

Putting in cabinets and floors and pain is just lipstick. It's just like throwing a 500 paint job on an old car to make it look great to the eye.

What I care about is what is under the hood (behind the walls) of the property. That's what can absolutely crush your cash flow for years and turn into a money pit.

What about the properties close by for the rents of 700-900?? Do they al have A/C?? If so that could be a huge issue for your renters and you have to drop the rent way down from 700 to compensate. If you want to add A/C and you start opening up walls in an old building you might find a bunch of things you do not like.

So on an old building asbestos, lead paint, galvanized pipes, knob and tube mixed with current electrical, undersized circuit panels, galvanized water main going to the, trees causing foundation issues, new roof needed, mechanicals needed to be replaced etc.

When you start adding up the big things it doesn't look as pretty anymore. If the inspection checks out make the seller put in A/C that way if they uncover big problems they eat that cost to put in. If they don't you walk away.

Jeremy Vohwinkle · Answer

Good call on the taxes. I just looked it up and that was the annual tax rate for last year when it was assessed at just $27,000. Given the updates and higher assessed value for 2013, taxes should be closer to $2,200.

And I'll admit I took a stab in the dark with insurance. I mostly based it on the $1500 I pay on my SFR that's worth about double the value of this property, but I don't know if the fact that it's a duplex vs. single family home really skews the premium or not.

Ryan M. · Answer

We are averaging $3,300/year for property taxes on a duplex. You should check that number.

Insurance of $700 maybe but I can get it for that in a commercial policy.

Water/sewer?

Figure average 10% gross for repairs, most years less and a few much more

I would be concerned on how old it is but you are almost hitting 2% and that's a winner.