I’m hoping experienced investors will let me know if you think these numbers make sense and if this looks like it would be a good deal.
I posted this info several weeks ago but didn’t get many responses. I’m still working on this deal and feel like I need to get off the fence one direction or the other. It seems like it could be a really good deal.
Seller has 3 duplexes that he and his brother own free and clear. I’ve been through each unit. They have been well maintained but the tenants don’t pick up and the places are a mess! Stuff everywhere.
The seller goes to Florida for 7 months out of the year. He said it’s hard to not think about how the properties are doing when he’s away for so long and just wants to be rid of them.
Here’s what I know…
Total of monthly rents for the 6 units: $3,234 (4 of the tenants are on HUD)
Expenses…I’ve checked the expenses I can with the city and energy company for accuracy.
Avg. Monthly Water/Garbage: $160
Avg. Heat/Electricity Month: $555
Insurance Month: $88
Taxes Month: $169
Total Monthly Expenses: $972
That leaves $2262/month for debt service, vacancy, repairs, and profit.
He is asking $150K for the 3 duplexes. The bank will loan me 65% of the appraised value and he will carry a second mortgage. Interest rate is 5.5%.
The properties have been well maintained. One of the furnaces is very old. Electric has been updated. They properties do have separate electric meters but owner pays for everything.
There seems to be a good cash flow here after all expenses. I’m just not sure if it is enough for the headaches that come with 3 duplexes.
Experienced investors operating duplexes and rentals…Would really appreciate your thoughts on this deal.
Hi Brian, I am NOT an experienced investor but I wanted to throw my .02cents in on what I would need to evaluate. I’m still learning so I would wait for a more experienced investor’s opinion.
Things that I would consider to further evaluate:
vacancy rate
taxes
down payment (equity) if any?
accounting cost
long-term savings
legal fees
I would consider accounting for at least some of those items before analyzing.
If your GSI is correct, and the property doesn’t need a boatload of repairs, this is a sensible deal.
With 100% leverage you’ve still got a great cushion for hiccups and so this appears to be an unusually good deal, terms wise. Your return is practically incalculable. :biggrin
Not knowing any more, I would do the deal as outlined.
Not that I am one to argue with the javipa, but i’d consider the fact that you are only generating $525/mo with 3 roofs! That seems like a little too much risk for me. Excuse me for being lazy and making assumptions, but you are probably socking away ~$200/mo for repairs. Divided that by the 3 roofs and you are looking at $75 a month per roof. That makes me nervous!
Ashon, he’s already accounted for ongoing reserves in the $1,400 in expenses per month. So, the cash flow is net after even roof reserves.
Unless there are exceptional deferred maintenance items, this deal is good.
Generic high leverage deals rarely offer this kind of cash flow, even with the most liberal assumptions on repairs, maintenance and management.
bcampbell has accounted for all these issues, including 10% management, which is really hard to cover on a project this small.
That all said, a small project is ‘really’ vulnerable to hiccups. Someone mentioned having an air conditioner stolen. That one event might upset the cash flow for a year or more. So, yes, on paper, this project looks better than the average high leverage deal, but it’s far from risk free.
In fact, I’ll go as far to say that low end rentals are enormously risky, because they ‘are’ vulnerable to hiccups.
That’s why I like apartments. You can better amortize the risks over many more units, not to mention spreading the management and maintenance costs across a wider number of units. FWIW
I agree that almost $600/mo cash flow is great. Especially on such a leveraged property.
Here’s the other thing I find concerning, as a precursor, I have not owned a hud property and have only read about the process, but I understand it can be upto 45 days for HUD to fill a vacancy. And with 2/3rds of his renters on HUD he’s looking at almost 8% vacancy rate assuming HUD doesn’t call for repairs after the move out. Of course all of this is circumstantial. Action is better than in-action.
Ashon, I don’t think HUD fills vacancies. Landlords do. HUD just provides prospects that we can dig through to find someone that pays their bills and appears to have half a brain. Meeting both criteria may cause an 8% vacancy, I don’t know. OK, just kidding.
I’ve rented to HUD people, and it’s not necessarily a slow process, but it is necessary to screen these people like you would anyone else. I suppose it also depends on if you’re in a major metropolitan area where there’s lots of people on the dole to pick from.
My understanding on HUD is that to have a HUD applicant rent from a LL the agency needs to inspect the property 30 days before the move in date, and any reinspection/fixes will add additional time. Of course I do not know. But am interested as our PM has left one of our units empty for 60 days and I need to fill it.
That’s not my experience. HUD will come within a week or two to do an inspection. The problem comes when they find crap and make you fix it. That causes delays. Meantime, allegedly, the higher, guaranteed rents make up for any delays (in theory).
We cannot make generalizations about HUD timelines because it can vary greatly. In my area, there are two HUD organizations. There’s one that only handles property in city limits and then there’s the other one that’s the regional one. That one handles several counties and deals with properties in my city too so I deal with both. The guy who handles the city HUD is really fast. I can call him when I have the property ready for inspection and he’ll usually come out that same day. The regional HUD organization is the exact opposite. It usually takes about six weeks from the time we approve an applicant and turn in the LL packet to HUD for the inspector to come out and look at the property. The regional HUD also changed some of their percentages for the tenant’s utility allowance and it’s driving down the rents. I’ve turned away several people the past six months because HUD wouldn’t pay anywhere near market rent.
Only you can figure out how HUD operates in your area. Both of you are probably correct about how your local HUD operates.
I will be going to our local HUD office to try to get info on how this program works in my area. When I walked through the units with the seller he told me that all he has to do is call the gal that works in our HUD office and tell them the tenants are not taking care of the unit and HUD will come out and make a visit and tell the tenant to clean up the place.
There is something to say about people having the possibility of losing their gravy train to make them behave. Our local inspector will tell people during an inspection that they need to take care of the place and keep things clean, but the HUD office shies away from getting involved in the LL/tenant relationship. If I have a problem and the tenant won’t comply, I just have to evict. HUD here doesn’t want in the middle of that. If your local office will help put pressure on tenants to do the right thing, that’s probably good for you.
I would ask HUD if those tenants are allowed to pay their own electric. Then I would give the tenants 60 day (or as required by HUD) notice that they need to transfer electric service into their names.
Give us an update on your interesting duplexes. “Don’t want 'er” units can be really good for you, the investor.