First Deal Analysis for Duplex in Norwich, CT

[Sean McFadden]

Hey guys, I wanted to run an analysis I ran on a property that was provided to be my by my realtor via MLS. Please note that this is the first analysis that I've run, so I'd like to know if I'm heading in the right direction and if I might be over/underestimating anything.

I am planning on house hacking this property. I will live in the 1BR unit for a year and rent out the 3BR unit upon purchase. I have factored in the rental unit income for my 1BR for purposes of CoC Return.

Pre-Qualified: $180,000 Loan

Property Price: $194,900 (Is it possible to get a loan for this amount when prequalified for less?)

Down Payment: 3.5% ($6,821)

Closing Costs: Estimated 5% ($9,745)

Estimated Loan Amount: $188,079

Loan Interest Rate: 3.25%

Loan Term: 30 Years

Mortgage Payment: $844.56

Other Monthly Expenses: $1,086.44

• Assumes 5% of Income for Repair Costs
• Assumes 2.8% of Income for Vacancy Costs
• Assumes 5% of Income for CapEx expenditures
• $159/mo for Electricity (Should tenants pay?)
• $107/mo for Gas (Natural Gas; Should tenants pay)
• $109/mo for Water/Sewer (Does Landlord usually pay)

Gross Income: $2,150

Monthly Cash Flow: $218/Mo

CoC ROI: 15.86% ROI

I am unsure on how to factor utilities costs into this equation. Above, I am assuming that I am paying those amounts monthly for the 1BR unit, while tenants cover their utilities for the 3BR. I think the estimates above are high for a 1BR but I think I can ask the realtor for average rates. I believe landlords typically cover the cost of water and sewage so I'm not sure if I'm underestimating that figure if that's the case.

All in all, this roughly seems like a solid deal pending there are no glaring issues during a walkthrough. Let me know if I'm totally off base.

[Jaysen Medhurst]

Hi @Sean McFadden. I think I saw this one last week. Is this it? To answer a few of your questions up front:

• You probably won't be able to borrow more than you're prequalified for. That means you'll have to bring an additional $8k to closing.
• Tenant should be paying for their own gas and electric. This, of course, assumes that those utilities are split out. Google Street view shows 2 electric meters. I don't see anything for gas. Ask your agent to confirm with the seller's agent. Make this a priority and don't move forward until you have a straight answer.
• Owner usually pays water/sewer, though.

As far as the rest of your analysis:

• You should assume a budget for initial repairs. There's always something!
• 2.8% is very low for Vacancy. I usually assume 8% for MFR.
• 10% combined for Repairs and CapEx is also low. Norwich's housing stock is pretty old. I wouldn't go less than 15% combined, unless you know that there have been recent renovations/CapEx items.
• You are missing both Property Taxes and Insurance in your analysis. Listing says taxes are $350/month. Insurance will probably be $75-150/month. Talk with a local agent.
• Always include Management (10%) in your underwriting, even if you plan to self-manage at first.
• Water/sewer looks high. I usually figure $30-40/unit/month.
• I expect your closing costs will be 1/2 what you have listed, unless they include up-front PMI or loan points.
• You also need to consider lawn care, snow removal, pest control, and admin/professional fees.

Bottom line: Although it looks like one of the nicest homes on the block, I think this property is over priced a bit. I don't think you'll cash flow after you move out due to the high leverage and relatively high taxes in Norwich. That doesn't mean this won't make a good house hack, though. If you can lower your living expenses, build equity, and gain land lording experience, those are wins. Just don't expect that this is going to make a good investment long term.