Good deal for duplex in rural area

General Real Estate Investing
1

Hi All,

I’m new to REIClub… Can’t wait to begin participating in this great community!

I have an opportunity to purchase a duplex in a rural area, and I’m looking for some feedback and advice.

Here is some background info:

  • Duplex side 1 rents for $600/month

  • Duplex side 2 rents for $575/month

  • Both sides are currently rented out with tenants

  • Each side has a one car garage, and similar duplexes in the area with the garages are renting for $650/month - a local realtor helped me obtain this information (obviously don’t want to speculate but the potential for $650/month from each side is likely).

  • Taxes are about $2300/year

  • Insurance is about $1000/year

  • Seller has owned for past 15 years, and vacancy has been very low (almost no vacancy whatsoever)

  • Assume no (or minimal) repairs are needed up front, this property is nice and is in fully rentable condition. It was built in 1985, but has been adequately maintained and has undergone some renovations in the last couple years to update the flooring, countertops, etc.

  • Property was originally listed with a realtor two years ago at $124,900 (never sold)

  • New realtor was hired one year ago, dropped price to $110,000 (never sold)

  • Now it is for sale by owner, with seller verbally saying they would drop to $100,000

  • Met with seller a month or more ago to see the property, and that’s when they said they would drop to $100,000

  • We never made any offers, and at this point we can only assume no other offers were made since seller is now asking if we are still interested - they are looking to list with a realtor again if we are not.

Would there be any other info that you would need to further evaluate this deal?

Would you go for this deal? Why or why not? If so, what would be the highest purchase price you would accept? What would you offer them to start the negotiations?

Thanks in advance for any advice you can give!

2

What are other, similar, duplexes selling for? What are the comps?

What is the typical rent/price ratio for units like these?

For example, if the gross scheduled monthly income was $1,300K/mo, a 1% rent/price ratio would put the value at $130,000.

The rent is actually $1,175/mo, so the value, based on a 1% rent/ratio wold put the value at $117,500.

The sale price you’re hovering at reflects a rent/ratio of about 1.1% with the current rents (if my math is correct).

Also, what are your five/ten year goals? Cash flow? Appreciation? Eventually you’ll have both, but usually what you want is supposed to happen within the first 10 years. So, just asking.

The seller says his vacancy factor is low. That likely is true, since you’ve determined that the market rents are $650/mo per door.

So, we’re back to the comps.

Regarding the analysis of this deal:

The rule of thumb is that your expenses, including management and maintenance will hover around 50% of your gross scheduled income …over time. Whether, or not, you actually experience this, is dependent on how long you own the property, and/or how well you actually maintain your units (and how much management time you donate).

This 50% is based on the market rents, not the current rents.

So, in this case the potential overhead will run $7800/year. Your net operating income (NOI) will be $7800.

So, whatever you can save on financing costs, will drop directly to your bottom line.

Using your $100,000 price and putting down 30% or $30,000, this would leave a balance to finance of $70,000.

Assumptions:
$70,000 first at 5.5%, 30/years, due in 10
$ 4,769 Annual Payment

Summary:
$14,100 Current Gross Scheduled Income
<$ 7,800> Expenses/Vacancy
$ 6,300 Net Operating Income (NOI/Price = 6.3% CAP Rate)
<$ 4,769> Debt Service
$ 1,531 Pre-tax Cash-flow

5.1% Pre-Tax Cash on Cash Return

$15,600 Potential Gross Scheduled Income
<$ 7,800> Expenses/Vacancy
$ 7,800 Net Operating Income (NOI/Price = 7.8% CAP Rate)
<$ 4,769> Debt Service
$ 3,031 Pre-tax Cash-flow

10.1% Pre-Tax Cash on Cash Return

Hope that helps. It’s a little mathy.

3

What state are you in? I have a duplex in a rural area on ND and there were no duplexes to comparable it two once we completed a major remodel. The appraiser and the bank agreed to do a valuation on a 4 bed and 2 bath house. This may be a reason for a slow sale. You did not say how big each unit was either. It seems like a very good deal to me.
randyscott