Analyze this Duplex rental deal

Rehabbing, Fix and Flip, Rental Properties
1

The housing market in my area is tight. I am eyeing this property in a middle class neighborhood to purchase and hold as a long term rental. What do you guys think of the numbers? I know you all say it has to cash flow, but is that after deducting for expenses ? And, am I allowing enough for expenses? The property is in pretty good shape now. Thanks.

Purchase Price $210,000
Equity Investment 10.00% 21,000
Mortgage amount, 30yr fixed $189,000

Closing Costs 6,300
Initial Deposit 2,000
Balance of Equity req. 19,000

Cash Required at Settlement $25,300

Total cash required $27,300

P&I @ 6.375% $1,179
Property Tax @ 1,271 106
Hazard Insurance 25
Liability Insurance 35
Monthly Payment $1,345

Gross Rental Revenue (825122) 19,800
maintanence (1,485)
capital expenses (1,089)
lost rent (1,063)
misc costs/turnover expenses (495)
Net Rental Revenue 15,669

Monthly Income 1,306

Mortgage payment - 1,345

Monthly Cash Flow ($39)

2

Howdy Tdorsey835:

I can buy a duplex for the down stroke you are spending as a down payment and collect rents of $400 per side. If you want just cash flow I would do deals like mine. It is in a small town in Texas and will not appreciate very much more than likely. I believe we are headed for steep inflation in our economy with fuel costs driving the costs of everything much higher. You may want to buy this deal but realize it is pure speculation unless you can use the tax write off.

3

Hi Ted,

Thanks for the response. In the suburbs of Baltimore/Washington there is no change I’ll find a duplex for sale for $20k- $30k and get $400 a side unless I go into the slums of the inner city. Not willing to do that. I can use the tax write off for depreciation and interest if I’m not mistaken. So assuming that, are you saying it looks like a decent purchase on paper? I understand that the appreciation is pure speculation.

Thanks.
Troy

4

Howdy Troy:

As long as you know it will not cash flow and you are betting on appreciation and can weather the storm if the sea gets rough then it could be a good deal. I prefer to make my money going in with positive cash flow and break even at 50% occupancy. A lot of guys will tell you the same and a lot will do deals worse than this one.

5

no one really ever talks of the equity your’re building in the house paid for by the rent. ?? although after maint, lost rent, turnover and PITI it may only be breaking even, I’m still counting on two things

  1. The rents will increase over time (hopefully faster than taxes)
  2. In ten years i will have +/- $ 75,ooo equity in the property (initial 10% down + 10 years payments on a 30 yr. mortgage) not anticipating ANY appreciation.

although, at first, cash flow isn’t there, it seems like a solid long term investment assuming I can stomach being a landlord and I have enough reserves to make repairs and handle vacancy (which i do)

any other opinions?
Thanks.

6

depending on the condition of the property, your expense figure are between borderline low and very low. Plus you have no managment fee in there (sure, you can do it yourself, but do your work for free?).

Also, you are abotu 1% low on your mortgage rate. The reality is you will do a 80/10/10 deal with a 7.25% 1st, 9% 2nd and 10% down.; that means your payment is off by more than $200/mn (or more). Even with top credit and 20% down, you can not get under 7% these days for investment property (30 yr fixed). I know as I’ve done 8 loans in the last six months. I watch the rate very closely.

Looks pretty sketchy to me; unless you get this for 20% under market then probably not the best first deal ot be had.

7

I’m curious about the 75K equity that you anticipate having at the 10 year point. A conventional loan (PI) based on the numbers you provided (189K @ 6.375) will net a principal contribution of approximately $28 at the end of year 10. Added to your 21K downpayment you will have a bit over 49K. Where is the other 26K coming from?

MG

8

Ok, here’s an update. My int. rate for the primary is 6.5 fixed , no pts, 30 yr- I just checked. Great lender/great credit. Your right, with 10% down, I will need a second. So the rate for that is 7.5 fixed, no pts, 15 yr. I found out the units are both under 1 yr. leases for 850 & 900/mo, but the Landlord furnishes oil for shared heat. Tenant pays electric. Hot water is electric. I increased the maint. allowance some- I own a construction co.- i can get stuff done cheap.

Purchase Price $210,000
Equity Investment 10.00% 21,000
2nd mortgage 10.00% 21,000
Mortgage amount, 30yr fixed $168,000

Closing Costs 6,300
Initial Deposit 2,000
Balance of Equity req. 19,000

Cash Required at Settlement $25,300

Total cash required $27,300

Primary Mortgage Payment
P&I @ 6.500% $1,062
Property Tax @ 1,679 140
Hazard Insurance 25
Monthly Payment $1,227

2nd Mortgage Payment
P&I @ 7.500% $195

Cash Flow Statement
Gross Rental Revenue ((850+900)*12) 21,000
maintanence (1,575)
capital expenses (1,155)
lost rent (1,125)
misc costs/turnover expenses (525)
water/sewer , by LL (180)
electric- by Tenant 0
oil- by LL, heat only 5 months 600
Net Rental Revenue 15,840

Monthly Income 1,320

Monthly Expenses 1,421

Monthly Cash Flow ($101)

MG- you’re right on the 10 year equity balance- I corrected my equity calc after 10 years to the following:

orig primary bal. $163,900 after 10 yrs $139,000
orig 2nd bal. 20,490 after 10 yrs $ 9,480

So, after 10 assuming no appreciation, equity should be-

value of house- $210,000
1st and 2nd- - $148,480
equity $ 61,520

original cash investment $27,300

equity gained/paid by rent $34,220

Although we won’t see 10%/yr. appreciation any longer, I think it’s safe to say 2% appreciation/yr isn’t out of the question. So we can adjust the 10 year value up another 10k safely.

As for managament fees- I’ll do it myself- it’s 5 minutes from work. I’ll consider the $34,000 increased equity + $10k appreciation as my payment.

Also, this doesn’t take into account that I can write off the interest paid and depreciation from my income taxes.

Thanks for the great responses- helpful. Any other thoughts? I value your opinions.

Troy

9

Troy,
It has been said of me that: “I pray at the altar of real estate.” I tell you that only so you will know where my heart is prior to giving you the following information: IMHO this is not a good deal. Simply not enough margin! You need to be paid well to deal with the crap that comes with owning/renting/fixing real estate!

If you were to take the same $27,000 and invest it in mutual funds, earning 8%, (compounded annually) in ten years you would earn $48,353 after taxes (25% tax rate). FYI it would earn $58,291 before taxes.

The link below will take you to a nice little calculator in which you can play with the numbers.

http://www.domini.com/learning-planning/Investment-Calculators/Savings-Calculator/index.htm

Please don’t misunderstand, I’m not suggesting that you take your money and invest in mutual funds, (unless you are looking to diversify) I’m suggesting that you find a better real estate deal.

As a footnote, the $6300 in closing costs should not be considered as equity. That money is spent, and other than the tax advantages attributable to closing costs, you don’t get it back.

I truly hope this is of use to you. I take no joy in dousing your enthusiasm.

Regards,
MG

10

MG,

Thank you. You offer an interesting perspective I had not thought of. I am currently invested in Mut Funds now, but have kind of left them alone for a few years, not thinking of the great returns I’ve been getting, in search of the next thing. Maybe I am being a little optimistic with this one, especially with the Landlord crap, repairs to a 100 year old house, etc. This is why I posted this info on here- to get an honest and unbiased and, hopefully, experienced opinion. Based on the numbers, do you have a target purchase price you’d max at? BTW- it’s on the market at $224,900 and I figured I could get it for $210k as noted. Also, what do you mean you pray at the altar of RE? Thanks.
Troy
thanks for the calculator

11

Troy,

The the praying at the altar comment was meant to poke fun at myself. I am a big believer (read: passionate almost to the point of a religion according to friends and family) in real estate investment. I wanted to convey that to you so that you would know that my critique was not biased against real estate investing. Hope that clears it up. No offense intended to you or anyone else on this forum.

The “magic number” in any deal is a tough thing to pin down. I know that I would want the possibility of beating (by a substantial margin) moderate returns on mutual funds before I would take the risk. Generally with investment real estate if you can’t look forward to decent appreciation to generate equity, the selling prices should come down so that you can make money on the income stream. You might want to do some research into how others are making money in your area.

As an aside, I use real estate investment software, into which you can plug your numbers and it gives you numerous ways to look at the value of the investment. If you want more info on this, send me your e-mail address through the forum.

MG

12

i’ve seen a lot worse; this look not too bad especially if you think you might have some upside on the rent at end of the leases. Ilike the fact that you use 2% for appreciation. I never used over 5% and I’m in SoCal; it keep me for buy properties that don’t make sense (despite crazy RE market trends).

13

MG,
Thanks for the advice and the calculator. My email should be viewable in my profile.
After looking at it a little more, I have to disagree with you slightly on the comparison to the mut fund investment.

  1. Investing my 27,600 in a mut fund earning an avg 8% for ten years would result in a fut value of $59,586 before taxes. No tax on gains until a sale, but mut funds generate long and short cap gains tax whether you sell or not as the fund manager has to report his sales as taxable cap gains. Unless it’s a tax smart fund, these can add up, eroding these earnings.

  2. There is no write off of depreciation and interest from income tax as there is with the rental prop. We haven’t factored in the +/- $4,000 personal income tax liability savings, equating to $200-$300/month less in my tax withholdings.

  3. At then end of ten years, the mut funds are worth exactly the 59,586. At the end of ten years, the rental property also may have a similar equity balance with some modest apppreciation, but, in the mean time, rents have risen, and I’m 5 years or, $9,400 from paying off the second note and generating some much better cash flows.

I’m not saying that I’m right on all this, just playing devil’s advocate and trying to look at all sides the coin.
If this property was to be had for $195k, does that get it closer to your comfort level? FWIW- as a ruler- there are two similar properties for sale in this town- one is $215,000 with rents of $700 and $730 and another for $197,000 with rents of $650 and $700. Unattractive numbers in anyone’s book. But illustrates what kind of margins are typically seen.

No offense on the real estate altar thing at all. I was just curious what you meant.
Thanks again.
Troy

14

Troy,

I misspoke (misposted?) when I indicated that you would earn X$ from your 27K investment. It should, of course, have been the future value of the investment would be 27K + earnings =. You obviously caught that but I didn’t want to leave it hanging for others to misinterpret.

Your points are all dead on target and those are the same arguments that I would be giving my DW (Darling Wife) while convincing her that “this real estate deal is better than your mutual fund investment”!!! You seem to be doing a great job of thinking this deal through from all angles!

For what it is worth, personally I would be much “happier” in this deal at anything under 200K.

Good luck, and please keep us posted!

MG

15

Does, anyone have a prospectus sheet they use to analyze possible multi-unit buildings they are thinking about buying?

I am looking to buy a multi-unit building in the next year (after I see what the housing market does). However, I would like a good formula/analysis method to analyze said properties.

Thanks!

16

I see two problems with this deal.

One, you aren’t looking for motivated sellers, or even discounted properties. You’re looking at retail sales. Nothing against this, but that isn’t RE investing, it’s RE speculating. Anytime that you have to figure in appreciation/write-offs to make the deal make sense, understand that that is speculation. By contrast, a RE investor makes their money when they buy. They not only don’t figure appreciation, but anticipate depreciation. For example, if the FMV of this property is $225K, then you should be trying to get it for no more than $180K total cost TOPS (that’s 80%). At that figure, all of your numbers improve AND you’ve got a built-in hedge against a) depreciation and b) a sudden need for a quick sale.

Two, it seems that you want to buy this property regardless. That fact that you brought it here is enough to take a step back and re-evaluate the deal. Don’t become a motivated buyer. Those tend to become motivated sellers down the road.

On an aside, the buildup of equity was mentioned. Equity may be good, but equity doesn’t buy the bacon. Postive cashflow does.

Raj

17

Raj,

Thanks for the response.

Of course I’m looking for a motivated seller/disc property. I found this property and was asking for opinions as to the FMV so I could determine a discounted price. It’s on the market at $224,900- but who’s to say that’s the FMV?- that’s only the asking price/Realtor’s opinion of the value. could be way high or discounted. I’ve seen other two units in the area on the market for $265k and up, with similar rents.

I think I noted that I wasn’t factoring in the potential for appreciation to make the deal work. Looking at that as a potential bonus.

Why not figure in the available write-offs as part of any cash flow statement? Unless the tax laws change, these are hard numbers (deprecitaion of the property and mortgage interest) that improve the cash flow.

I don’t want to buy the property regardless. I want to buy it at a price that makes sense long term. As I noted, in this area, the market is tight, and this is the best deal I’ve found so far.

I don’t understand why you say the fact that I brought the deal here for feedback indicates that I’m too eager to buy. I thought that was the purpose of this forum- to solicit other’s opinions of deals and take all advice with a grain of salt and them form your own best opinion.

Although at first, the cash flow may not be there, currently, my salary does fine buying the bacon. Long term buildup of equity is what’s going to put my daughter through college in 17 years.

As I stated earlier, I’m evaluating this deal (or any other deal) against the alternatives of mutual funds and bonds.

Thanks.
Troy

18

Okay,

First, ALL seller’s are motivated, so that’s not the best term to be using. What you’re interested in finding is a desperate seller. Those are few and far between on the MLS.

Second, if it’s on the MLS, then an agent should have pulled comps and given a fairly good estimate of value to the seller. Yes, it could be high because sometimes agents will list a prop at the seller’s requested price regardless of the agent’s comps just so they can get the listing. The agent’s hope is that they’ll conduct a slow Dutch auction and keep reducing the price until someone bites.

I doubt that it is a discount price because if it was, we wouldn’t still be having this conversation. The deal would have been under contract within days of going on the market.

As to getting opinions of FMV, there are too many variables for any one here to give you an idea. You’re going to need that Realtor’s opinion that is knowledgeable of your market.

Do tax-write offs increase monthly cash flows? No. At best, they offset the “oops” factor. That’s those things that come up that you didn’t think about.

I didn’t say that bringing the deal here makes you eager to buy. I said that bringing the deal here means that you didn’t trust the numbers enough to go ahead and make the purchase. People posting deals here generally fall into two types: 1) Someone that doesn’t know what a deal really is and/or is too scared to make the deal or 2) Someone that is trying to rationalize the numbers on something that really isn’t a deal.

IF you are buying for equity buildup, fine. There is nothing wrong with that so long as you are clear that that is the reason that you’re buying. My personal choice is to buy properties at a discount NOW, so if there is no equity buildup, then you’re still golden.

Hope it helps,

Raj

19

Thanks Raj,

All good points. I’m thinking I’m gonna pass on the ‘deal’. Just not enough positives to make it work.

Also, since the house is built in 1860, it has lead paint. Maryland’s lead paint Law requires any house built before 1950 to be registered at $15/yr. Big deal, but much worse than that is:

The landlord is required to perform a ‘Full Risk Reduction’ (clean up and paint) at each Tenant change and have the lead swab tests done and submitted to the State.

I checked with two testing agencies and both were about $800 per test per unit. and the test results typically take 2 weeks. So, everytime a tenant moves out and before a new one moves in, I’m automaticaly out one months rent in addition to regular clean up costs. Not to mention the guarunteed one month vacancy.

Now you say, why not just rent it out anyway? (like the current landlord has) From what I can tell- full participation in the program limits the Owner’s liability to +/- $15,000 in the event of a lead poisoning occurance. If there is a lead poisoning and you are not registered and current with inspections, your liability to the Tenant is unlimited.

The more I study it, the worse it gets. Anyone else have any dealings with lead paint in rentals?

Thanks.
Troy

20

lead paint in rental is non-issue in my book. I give them the same information as I would give a seller of a pre-1978 house and state to them I have no knowledge of whether there is or is not lead paint (which I don’t becuase I never test).