Buying Duplex in A Hot Market

[Billy Zhao]

From the onsite, it doesn't appear to be a good deal. Please give me some of your thoughts:

Type: Duplex, fairly new, not a fix-upper (mostly updated, need minor updates that shouldn't cost more than $5,000)

Asking price $415k

Rent generation: $1300 x 2 = $2600/mo

Assuming borrowing 75% with 25% down at 3.5% for 30 years, the mortgage cost is about $1,400

Property Tax is roughly $6,500/year or $542/mo

8% vacancy, 8% management fee, 5% repair expenses

The calculator comes out to be -$150 cash flow. Not ideal.

When adjusting the offer price to $380k, the cash flow is about $150.

The problem is, in the market I am in, this property will likely be sold at asking price with in days and possible with multiple offers. The appreciation in this market has been insanely good, but I am primarily seeking cash flow first.

What would you do?

One area of improvement that can potentially increase rent is to reconfigure the kitchen to make it look more modern and inviting. The problem is that this duplex is sitting in a group of similar duplexes that I can only characterize as class C+. I doubt that people willing to pay higher rent really find this street inviting. 

In addition, putting 25% down (over $100k) will tie up a lot of cash. I don't see how I can refinancing and get my investment cash back out any time soon. Maybe in 4-5 years after some hefty appreciation. 

[Roc Pilon]

This is similar to what is going on in the Boise Idaho market as well. Duplexes I bought for 150k 5 years ago are going for 400-500k.

Here's what you need to understand, what doesn't cash flow for you doesnt mean it wont cash flow for someone else. If you have someone who sold a lot of real estate in one of these cities with moronic governments running it, they will be 1031ing their money into your market. Which is very common to see in Austin, your market is similar to mine. 

Now, they dont care about overpaying or the concerns you have. They are buying with cash, trying to avoid capital gains taxes and want to store their money. Unfortunately, this is out of your control, you need to look for gaps in your market. A property with a lot you could develop, or a shop you can turn into a unit. You need to create your deals now because of market competiton.