Duplex for 1st Deal | Should I Buy???

Question

Hello BP,

I could use some help on determining what to offer for this duplex. I don't know if there is a rule of thumb for what to offer, I think I read in a post that an investment offer should be 30% off ARV - repairs. Below is the potential deal. My primary strategy is to BRRRR.

DUPLEX Analysis

This is a duplex built in 1953. It is 4 side brick, 2BR 1BA on each side. 1450 total square feet.

Asking Price = $80,000
ARV = $120,000 - $150,000?
- It's hard to determine because there aren't many renovated duplexes in the area that have sold within a 1-2 mile radius in the past 12 months.
Est. Repairs = $40,000
- New Roof
- HVAC - Currently has window AC units
- Remodel kitchen & BA
- Possibly new windows
- Flooring
- Washer & Dryer connection are in the kitchen, so I need to figure out what to do with that.
- Owner says that there are no problems with plumbing and electrical, but it's an old property

Recent Rents = $700 per side ($1400 per month)

My analysis per the BP BRRRR calculator says that I would still cash flow (see image below). I did not account for many expenses other than vacancy as I would be doing a lot of rehab and manage the property myself. The primary problem is that I would leave almost $36,000 in the property if I tried to BRRRR, which isn't a good BRRRR. My lender will only do 70% LTV cash out refi on MF properties and that is based on the lower of the appraised value or the total investment costs.

If I was to change my strategy to just buy and hold, make minimal repairs and keep renting the deal may look better. But the property could be a headache as I didn't do a lot of repairs.

Link to Analysis Image: DUPLEX analysis

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Background Info

I have spent the vast majority of 2020 reading REI books, attending webinars, watching REI YouTube videos, reading on the forum and have talked to other investors. All leading up to me knowing enough to learn my market, find deals, make offers, close the deal and follow whatever strategy was determined for that property.

I started driving for dollars a few weeks ago (even got Deal Machine) and I have now made contact with 2 owners. I like the properties, the city is investing in the area as sidewalks, lighting and new pavement are being put on the main street. The hard part for me now is, what do I offer?? I am so anxious to close my first deal. I don't want to be stuck in analysis paralysis, but I don't want to make a bad decision because I'm anxious to close my first deal. I keep hearing @Brandon Turner 's voice saying you just have to do your 1st deal.

Ryan Copeland · Answer

Thanks Dan, really insightful info. To your point, if $40k seems low then I really don't need to purchase at $80k and significantly go over that $40k mark. Another caveat in this deal is not really knowing the ARV. I couldn't find any credible comps in the area, so like you said what would my refi look like? If I'm all-in at $120-135k, then my ARV would need to be around $170-180k in order for me to get back most of my money. The max I would want to leave in the property is $20,000.

Dan Weber · Answer

Hi Ryan, unless you plan to do all the construction yourself, $40k seems low for a new roof, new HVAC system, two new kitchens, two new bathrooms and all new windows. Maybe bring a GC through to help get you a more specific number? Also, unless you plan to make the numbers work with a refi of $120k, you need to lock down that ARV cost to something more specific. I'd talk with some local agents and see what they think. You could also pay an appraiser to come in during your due diligence period and do an ARV appraisal for you based on some of the work you plan to do. Also, when it comes to those comps, I try to not look back past 6/1 or 5/1 of this year. In my area, the real estate sales prices during COVID were even higher than the crazy prices before COVID started and some of the pre-COVID comps are irrelevant now.

Ryan Howell · Answer

Sounds like a solid deal from a cash flow perspective...is the $700/mo rent as-is or after you remodel? Your lender should also have a seasoning period after which they will only calculate LTV from appraised value...typically 6 months which could help you. In my area, washers and dryers are often in the kitchen in these smaller multifamily properties. Also, HVAC could be done at a later time? I would consider a middle scenario, where you invest in some basic updates, such as kitchen, bath and maybe flooring and wait on HVAC, windows. That might help you get the rents up and still have a decent ARV, but with less out of pocket. Then you can add the other items later.

Corey Louton · Answer

@Ryan Copeland Hi Ryan, your deal looks good on the calculator analysis number wise. What class property/neighborhood is this in? That will have significant impact on tenant quality and duration. I have a couple duplexes in lower income areas and the turnover is more often than I would like, but that was a risk I was willing to take when I invested in that area. You will always have reservations and hesitation on your investments, however more so on your first deal. Look objectively at your risk/reward and your long term goals then make your decision then see it through. You just have to pull the trigger to get started. There are 2 great quotes from athletes that I regularly tell myself when I am on the fence; “you will miss 100% of the shots you don’t take” - Wayne Gretzky and “everyone has a plan until they get punched in the mouth” - Mike Tyson Apply where necessary. Hope this helps, best of luck. Corey

Karl Schmidt · Answer

@Ryan Copeland location, location, location. And then run the #’s

John Mazzella · Answer

@Ryan CopelandIf your plan is to use the BRRRR method, leaving a chunk of cash in the deal seems like it isn’t worth the hassle. For a BRRR property one of the main benefits is being able to reinvest your capital again. Also I second what many before me have said about locking down the ARV.Best of luck!John

Nemat Waseem · Answer

@Ryan CopelandI am fairly new to BP but I help with flipping properties here in Northern California; When my partner initially hired contractors our overall price for the project of flipping a house which generally Included ( New roof, bee flooring, new painting, other cosmetics, and HVAC ) ran around 60k minimum. However when we took over and did the management and hired subcontractors, the price went down to almost 40k. California is pretty expensive so I think around 40K-50k is a okay approximation for your repairs and fixes if you do choose too. I am not familiar with your market so take my work as a grain salt . Also, just think your first deal, as Brandon says, is more about learning and less about getting it perfect. Cheers brother !

Aaron Stoddard · Answer

@Ryan Copeland you are going to want to get a quote for the plumbing and electrical. If it is original it is very old and outdated, making repairs impossible. Not to mention older plumbing was typically galvanized pipe which will rust out causing pinhole leaks. With the age of the unit I would not pay anywhere near asking price unless it has the major electrical, plumbing, and foundation repair that is likely needed. Regardless of the other aspects of the rehab. I think he knows this and is trying to get out. If you work him down on price using estimates from an electrician, plumber, carpenter, and roofer you will get your best deal.

Ryan Copeland · Answer

Hahaha, thanks @Corey Louton.The property is in a class C neighborhood if I understand the how these classes are defined. I think it will be trending more towards a class B neighborhood though, thus my interest in purchasing.

Ryan Copeland · Answer

I agree that the deal is solid from a cash flow perspective. My primary problem is leaving roughly $36k in the deal even if I do a BRRRR. You make a good point about maybe waiting on the HVAC.The $700 rent is in it's current condition. I was able to find one other MF property that had been renovated recently and they are asking $825 per side. It was originally listed higher, maybe $900 or $850, but the owner has dropped the price.