# Good deal? Need opinions!

I have a contract to buy an all brick duplex in good shape (just needs cosmetics) in the Dallas Texas area (Oak Cliff). 2/1 on each side, seperately metered, originally built as duplex, 1800+ square feet total building size. Not the best part of town but not scary either, walk to light rail, near new development, close to downtown Dallas, quiet street.

Purchase price \$41,000
Should be able to get \$650 per side, probably \$700+ section 8.
No mortgage, cash purchase

Thoughts?

Trying to do the numbers here like Propertymanager:

\$44,500 = Purchase plus rehab
\$650 = Monthly operating expenses (1/2 of rent)
Mortgage cost 44.5 x \$7 = \$312
\$650 (1/2 of rent) - \$312 = \$338/monthly profit. Very nice.

I figured the cost as if you had a mortgage, because you have invested that money (\$44,500) in the property, so it isn’t out there earning you interest somewhere.

A quick rule of thumb for calculating a 30-year investment loan @ 7.5% is to use \$7.00 per thousand as the monthly amortized cost of borrowing. Therefore, 44.5 (thousand) x \$7 = \$312/month for 30 years.

Now, what if you furnish those units?
\$44,500 + \$10,000= \$55,500 (\$5,000/unit for all appliances, furnishings)
Rents=2.5 times unfurnished = \$1650/unit
Operating expenses = \$1650/month
Cost of mortgage plus furnishings = \$55,500
55.5 x \$7 = \$389/mo. 30 year mortgage @ 7.5%
\$1650 - \$389 = \$1261/monthly profit.

I still see furnished as a great way to go; it is not hard to do this for 1 or 2 or 3 units. Anymore than that and you are talking lots of labor cleaning, showing, emailing pictures, advertising.

Please let me know if I am missing anything. Would this work for your duplex?

Furnishedowner

Thanks. I like the furnished idea for another property in a better area. I am worried the furnishings would be stolen in this part of town. I do have another home in a great area that I need to consider furnishing next time around.

I know that part of town! That deal is great for a reason. If you’ve never been a landlord in that area, tread carefully. You will quickly learn the term “chasing your money”. Also, not many Section 8 ppl want to live in that area. That’s the area where they are trying to GET OUT OF. I have about 10 houses in DFW and 30 in East TX.

Exodallas

I am kind of confused here…
I am buying a home for \$205k and probably spending \$10k to fix it. Now according to your calculations my profit would be -\$505?? I am lost! I might be renting the place for \$2000… Is this right??

If you spend have \$215,000 in a rental with monthly rents of \$2,000, you’re going to lose money! OUCH!

Mike

Mike,

I thought I was going to MAKE not Lose!? This is an all cash deal and I was planning on renting it for about \$2k plus utilities. That will leave me with about \$1k a month (after insurance and taxes). All i am making now on the \$200k at the bank is not even close to \$1k…HOw is that losing money? I am new at this so please do explain!
Also, i will be holding this property but do plan on selling in the near future and make at least \$40k if not more!

-Mimi

If you have \$215K cash to invest, you could find some good deals and use that money as down payments for mortgages on multiple properties. The deal you’re describing is not good. You should have rents a little above \$4k on a \$215k property. If you can’t do it, it’s not a good deal. In the deal you are describing, you are trying to “buy your cash flow.” Rather than finding a better deal (with a lower purchase price and/or higher rents), you are saying because you’re doing an all cash deal you will have money left over at the end of the month. You can do much better with that amount of money than the deal you’re describing.

Mimi,

Throughout the United States, operating expenses run 45% to 50% of the gross rents (although you’ve apparently alloted that amount for only taxes and insurance). There are MANY expenses in addition to taxes and insurance, such as advertising, vacancies, management (even if you do it yourself), maintenance, utilities (if only during vacancies), legal fees, evictions, capital expenses (not technically an operating expense), etc, etc, etc.

If the operating expenses are 50% of the gross rents (assuming your \$1,000 for taxes and insurance is wrong), then this is how this deal looks to me:

Gross rents: \$2,000
Operating Expenses: \$1,000
NOI: \$1,000

Since you are paying cash, your apparent cash flow is \$1,000 per month, however you haven’t accounted for the cost of the \$215,000 that you have in the deal. There is a cost to that money, whether you’re using your own money or are borrowing the money. If you were borrowing the money at 7%, the mortgage payment would be \$1,430 per month, meaning that you would lose \$430 per month. That is why I said that this deal was a loser. Buying the cash flow by paying cash does not change the quality of the deal.

However, you are correct that if you pay cash, you shouldn’t be paying cash out of your pocket each month to support the property. In fact, your cash on cash return would be about 5.6%. The big question is whether that’s an adequate return on your money considering the risk involved? Personally, I wouldn’t do it.

Good Luck,

Mike

Guys,

Thank you so much for these tips. I am in the beg stages of investing and could use all the help i can get.
This is sinking in just now and it is starting to make sense…

-Mimi