Analyze this Duplex rental deal

[tdorsey835]

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 (825*12*2)            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)

[tedjr]

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.

[tdorsey835]

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

[tedjr]

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.

[tdorsey835]

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.

[aak5454]

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.

[Wu Wei]

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.

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

[tdorsey835]

  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

[Wu Wei]

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

[tdorsey835]

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

[Wu Wei]

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

[aak5454]

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).

[tdorsey835]

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

[Wu Wei]

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

[phatman5]

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!