Analyze this Duplex rental deal

[Roger J]

I see two problems with this deal.

One, you aren't looking for motivated sellers, or even discounted properties.  You're looking at retail sales.  Nothing against this, but that isn't RE investing, it's RE speculating.  Anytime that you have to figure in appreciation/write-offs to make the deal make sense, understand that that is speculation.  By contrast, a RE investor makes their money when they buy.  They not only don't figure appreciation, but anticipate depreciation.  For example, if the FMV of this property is $225K, then you should be trying to get it for no more than $180K total cost TOPS (that's 80%).  At that figure, all of your numbers improve AND you've got a built-in hedge against a) depreciation and b) a sudden need for a quick sale.

Two, it seems that you want to buy this property regardless.  That fact that you brought it here is enough to take a step back and re-evaluate the deal.  Don't become a motivated buyer.  Those tend to become motivated sellers down the road.

On an aside, the buildup of equity was mentioned.  Equity may be good, but equity doesn't buy the bacon.  Postive cashflow does.

Raj

[tdorsey835]

Raj,

Thanks for the response.

Of course I'm looking for a motivated seller/disc property.  I found this property and was asking for opinions as to the FMV so I could determine a discounted price.  It's on the market at $224,900- but who's to say that's the FMV?- that's only the asking price/Realtor's opinion of the value.  could be way high or discounted.  I've seen other two units in the area on the market for $265k and up, with similar rents.  

I think I noted that I wasn't factoring in the potential for appreciation to make the deal work.  Looking at that as a potential bonus.  

Why not figure in the available write-offs as part of any cash flow statement?  Unless the tax laws change, these are hard numbers (deprecitaion of the property and mortgage interest) that improve the cash flow.

I don't want to buy the property regardless.  I want to buy it at a price that makes sense long term.  As I noted, in this area, the market is tight, and this is the best deal I've found so far.

I don't understand why you say the fact that I brought the deal here for feedback indicates that I'm too eager to buy.  I thought that was the purpose of this forum- to solicit other's opinions of deals and take all advice with a grain of salt and them form your own best opinion.

Although at first, the cash flow may not be there, currently, my salary does fine buying the bacon.  Long term buildup of equity is what's going to put my daughter through college in 17 years.

As I stated earlier, I'm evaluating this deal (or any other deal) against the alternatives of mutual funds and bonds.

Thanks.
Troy

[Roger J]

Okay,

First, ALL seller's are motivated, so that's not the best term to be using.  What you're interested in finding is a desperate seller.  Those are few and far between on the MLS.

Second, if it's on the MLS, then an agent should have pulled comps and given a fairly good estimate of value to the seller.  Yes, it could be high because sometimes agents will list a prop at the seller's requested price regardless of the agent's comps just so they can get the listing.  The agent's hope is that they'll conduct a slow Dutch auction and keep reducing the price until someone bites.

I doubt that it is a discount price because if it was, we wouldn't still be having this conversation.  The deal would have been under contract within days of going on the market.

As to getting opinions of FMV, there are too many variables for any one here to give you an idea.  You're going to need that Realtor's opinion that is knowledgeable of your market.

Do tax-write offs increase monthly cash flows?  No.  At best, they offset the "oops" factor.  That's those things that come up that you didn't think about.

I didn't say that bringing the deal here makes you eager to buy.  I said that bringing the deal here means that you didn't trust the numbers enough to go ahead and make the purchase.  People posting deals here generally fall into two types:  1) Someone that doesn't know what a deal really is and/or is too scared to make the deal or 2) Someone that is trying to rationalize the numbers on something that really isn't a deal.

IF you are buying for equity buildup, fine.  There is nothing wrong with that so long as you are clear that that is the reason that you're buying.  My personal choice is to buy properties at a discount NOW, so if there is no equity buildup, then you're still golden.

Hope it helps,

Raj

[tdorsey835]

Thanks Raj,

All good points.  I'm thinking I'm gonna pass on the 'deal'.  Just not enough positives to make it work.

Also, since the house is built in 1860, it has lead paint.  Maryland's lead paint Law requires any house built before 1950 to be registered at $15/yr.  Big deal, but much worse than that is:

The landlord is required to perform a 'Full Risk Reduction' (clean up and paint) at each Tenant change and have the lead swab tests done and submitted to the State.  

I checked with two testing agencies and both were about $800 per test per unit.  and the test results typically take 2 weeks.  So, everytime a tenant moves out and before a new one moves in, I'm automaticaly out one months rent in addition to regular clean up costs.  Not to mention the guarunteed one month vacancy.  

Now you say, why not just rent it out anyway?  (like the current landlord has)  From what I can tell- full participation in the program limits the Owner's liability to +/- $15,000 in the event of a lead poisoning occurance. If there is a lead poisoning and you are not registered and current with inspections, your liability to the Tenant is unlimited.

The more I study it, the worse it gets.  Anyone else have any dealings with lead paint in rentals?  

Thanks.
Troy

[aak5454]

lead paint in rental is non-issue in my book.  I give them the same information as I would give a seller of a pre-1978 house and state to them I have no knowledge of whether there is or is not lead paint (which I don't becuase I never test).

[Roger J]

Lead paint is basically a non-issue in my book as well, aak, but we also don't have to deal with that type of law on the state's books either.

Those are some pretty steep numbers on LBP.  Definitely worth figuring into the equation.

Raj