., You have several issues going on here :)First, as @J Scott said, you will have a $25K gross profit from your flip.

If they do not have equity, then the only advantage to buying it sub2 would be if the gross income less all expenses still gave a positive net return to you, otherwise, move on or try to move it to a short sale.

Just wondering if capital improvements should be part of the expenses (i.e. should they be deducted from gross income to arrive at NOI).

That says that, if you use a PM, expenses, capital, and vacancy will eat up 50% of the gross scheduled market rent.

Are you going to sub meter or include in rent as a gross lease?

This thing brings in gross rents of $5900/month and the realtor said his expenses are around $1000/month.

Are you sure that $20K in rehab ($32,500 all-in) will get you $2750/month in gross rents?

Cost Assumptions Strike Price $1,050,000 Property Value $1,281,293 (Improvement $1,030,429, Land Value $200,000, Accessory Value 50,863)Closing Costs $31,500 (3%)Cash in $346,500 ------------------------------------- Financing Assumptions Downpayment 30% Finance Amt $735,000 Downpayment Amt $315,500 Interest Rate 6.0% Mortgage (Years) 20 Mortgage Payment $63,189-------------------------------------- 40 Unit Mix18 - 2 Bedroom 1 Bath Townhouse 8 - 3 Bedroom 1 Bath Flat 14 - 3 Bedroom 1 ½ Bath Townhouse -------------------------------------- Revenue Assumptions using current rent rollGross Potential Income $292,920 Gross Operating Income $263,628 (10% vacancy)Actual Income2012 $251,0002011 $282,3782010 $271,791-------------------------------------- Expense Assumptions50% rule $131,814Actual Expenses2012 $166,2452011 $144,8252010 $142,500-------------------------------------- Cash Flow & ROI Net Operating Income $131,814Capitalization Rate 12.6%Monthly CF Per Unit/Door$142.97 Break-Even Ratio74%5 yearsCOC Return (CFBT/ Acq Cost)20%Debt Coverage Ratio (1.5min)2.09Principal, Interest, Taxes, Insurance (PITI)$96,462Ratio (1.2min)2.73Need to also get a good walk through of the property to gain better insight into condition and any deferred maintenance needed right away.Its not a steal of a property but a decent deal and from what we found out so far a lot of it has been updated in the last 3-4 years.

I've kicked this idea around with some of my single family rentals.I think it largely depends if there is a big disparity in what the two new units would rent for together compared to what the house would rent for by itself.I have one house in particular that is perfect for conversion but the two units together might only gross $100 more than the house would rent for as a single unit.

Sure you don't mean gross rent.Your best shot at cash flow is to go to a low priced area.