please take a look at this deal

General Real Estate Investing
1

So, I’ve found a duplex in a fairly nice area (not high end, but not the ghetto), and the numbers, to me, look intriguing.

10002 ft² Duplex.
Newly remodeled duplex with 2 bed, 1 bath, 1 car garage units. Large living room and separate eat in kitchen,and full-size basement with laundry hook-ups. Newer floors, all new paint, light fixtures etc. Tenants responsible for ALL utilities.

Asking: $115,000
Rent per side: $700

It’s been on the market for a month, so I could probably get it for cheaper, but just going off the asking price, here are the numbers I came up with:

$115,000 PRICE
-$23,000 DOWN PAYMENT
=$92,000 FINANCED (30YR, 5.5%)

$1,400 GSI (GROSS SCHEDULED INCOME)
-$700 EXPENSES (not sure if this is an accurate number since tenants are paying utilities…help?)
=$700 NOI (NET OPERATING INCOME)
-$523 DEBT SERVICE (30YRS, 5.5%)
=$177 CASH FLOW (PRE-TAX)

$2,124 ANNUAL PRE-TAX CASH FLOW
(ROI OF 9.2%)

Now, I know the ROI isn’t that great using the numbers I provided, but considering the tenants pay all utilities, would this change my expenses significantly?

Expenses being the same, and if I could get this place for, say $105,000, that would change my ROI to: 12.8%

Could someone help me out with the numbers here, specifically the EXPENSES?? Would I still use the 50% rule if the tenants are paying all utilities?

Thanks!

2

We only pay water/sewer/trash on a few of our properties. On the vast majority, the tenants pay everything. We still use the 50% rule. Why? Because it’s conservative.

Remember operating expenses include everything you can possibly think of:
Maintenance, repairs, vacancy, property taxes, insurance, income taxes, paper, ink, postage, replacement/repairs due to theft, legal expenses, utilities during vacancy for rehab, lost rent because the tenant gave you a story why they couldn’t pay and you let them stay, etc…

If you start doing deals that are too thin on profit margin and you try to force them to work, you won’t be prepared when things go wrong.

We have bought several properties that have been foreclosed on because other investors weren’t careful enough with how they ran their business. Don’t be the investor that loses what you’ve worked hard for.

3

Thanks, Justin. Wasn’t quite sure if the 50% rule included utilities…now I do!

One question: Given the above rental income, what is the maximum price that you would pay for the property in order to be comfortable with the margins? And what calculation did you use to come up with your conclusion?

4

You are correct, the 50% rule does include utilities, vacancy, maintenance, taxes, insurance but it does not include mortgage payments (as you indicated in your cash flow analysis) and property management fees.

I recommend investors to only consider properties that can cash flow under the 50% rule. If in the end, the actual cash flow is better then happy you but buying based on a conservative estimate is a safe move.

5

Thanks, Simon. What kind of cash flow would you be happy with when investing in a duplex? I’ve always heard that you should expect at least $100 per door. In that case, if I were able to purchase this property for somewhere around $105,000 (using the 20% down payment and calculations above), I could theoretically expect a $220 cash flow (~$110/door). Would that sound good to you?

6

Even at $115,000 with 20% down as you indicated plus using the 50% rule, you would be looking at $178 per month in your pocket. Applying the $100 per door indicator, your purchase price would need to be $110,000. With that purchase price, you would be seeing a cash on cash return of 10.9% and a capitalization rate of 7.6%. Not bad.

7

Thanks a lot, Simon. I’m looking more into this property. Can you give me advice on the proper way to go about researching the property more thoroughly? I know I’ll need to find a licensed appraiser, and also find out what the utility bills have been for the past year (I may want to live in one side of the duplex). Do you have a checklist of things you do (and who to see/how to do them) before you buy a property? Sorry, I’m a newbie still, and this will be my first property. Any and all suggestions would be greatly appreciated.

Thanks!

8

If you will be getting a loan, do not worry about getting an appraisal. The bank will hire a good one for you. If you get an appraisal, the lender cannot use it. They have to order it themselves.

Before writing an offer: Double check your income and expense projections. Make sure your projected rents are market based (i.e. talk to your real estate agent). Check with the utility companies to verify expenses. Calculate your taxes based on your suggested purchase price. Call and get quotes on homeowner insurance. Do this to verify that your cash flow is realistic.

In the offer: Make your offer contingent on a “Satisfactory inspection.” Then hire a licensed and highly recommend home inspector or bring a good general contractor with you to inspect the property. You may also want to make the offer subject to loan approval just in case the bank refuses financing, you can get your earnest money back.

After the offer is accepted: From here your real estate agent will get papers over to the title company to pull title insurance and arrange closing documents. They will do a title search to make sure that area is okay. This is your time to do your due diligence (i.e. your inspections and finalize financing).

Simple as that.