Author Topic: Duplex Rental Property Case Study  (Read 3222 times)

robots4joey

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Duplex Rental Property Case Study
« on: April 15, 2015, 10:06:59 AM »
Hi All,

First time poster! I really appreciate the advice you give on these forums! I have gobbled up a lot of information here! Thanks for your help!

We (Wife and I) have two duplexes on the same block that we bought a year and a half ago. I saw another one for sale and it's very similar to what we already have, and about a block down the street from ours. It hasn't been long enough to really know what the real-world averages are for our properties yet, so I could really use a gut check to make sure we aren't digging a deeper hole with buying a third duplex.

This past year we had an tenant eviction (they came with the property- not our pick), a major re-siding project, and numerous repairs with plumbing, doors, and window replacements. I've done most of the work myself, but I do have a property manager for collecting rent, getting the call at 1am that the water is leaking, and finding new tenants when vacant. So we didn't make much $$ last year, one rental grossed a thousand or so, and the other lost a couple hundred. I don't think that's going to be typical, but that's partially why I want to get your advice on this third property.

Here's the details:

Property Description: 1910's duplex on slab foundation with 2br/1ba 760sqft each side 2 car garage for one, shed for the other side. Quiet residential and duplex neighborhood in good area. All brick exterior and <5yr old roof
Market Value: Hard to quantify. I would say it's selling at market.
Original Purchase price: $88,000 (obviously hoping for some negotiation here)
Original Mortgage Amount: $66,000(25%down)
Interest Rate: between 4.5 & 5%
Mortgage Term: 30 years
Gross Rents: $1110 ($550 and $560) These are market rents as I have new tenants in ours at these prices.
Principal and Interest (the P&I of your PITI - should match with the above info):  $353/mo
Taxes and Insurance (the T&I of your PITI): $180/mo
HOA costs: $0
Lawn and Trash: $40/mo (averaged by year)
Management fee (10%): $111/mo
Deferred maintenance notes: no major projects/repairs currently known
Maintenance/repairs budget: $250/mo Is this a safe estimate? I included some big ticket losses every few years for rehabbing or major issues.

When I add it all up I see about $100/month cash flow with 92% occupancy. Does this look like a sound investment? Am I missing something? This would definitely tap out our borrowing potential for a while. Thanks again for your help!

arebelspy

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Re: Duplex Rental Property Case Study
« Reply #1 on: April 15, 2015, 01:57:30 PM »
For a house that old, with that low quality of tenant, with that low of a rent to purchase price ratio (barely above 1%), I'd pass, personally, and look for one with better numbers.
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robots4joey

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Re: Duplex Rental Property Case Study
« Reply #2 on: April 15, 2015, 03:52:02 PM »
I've since discovered that it's a 1948 duplex. Not sure how they got 1918 on the tax record, but there's no way it's that old.

I thought a 1.25 wasn't too bad. If I use 1.25 on the house I live in I would be charging way over market rent!  I thought getting much better than 1.25-1.5 was impossible without cheap houses or rehabb's?

Anyone else care to chime in?

iamlindoro

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Re: Duplex Rental Property Case Study
« Reply #3 on: April 15, 2015, 09:06:05 PM »
I've since discovered that it's a 1948 duplex. Not sure how they got 1918 on the tax record, but there's no way it's that old.

I thought a 1.25 wasn't too bad. If I use 1.25 on the house I live in I would be charging way over market rent!  I thought getting much better than 1.25-1.5 was impossible without cheap houses or rehabb's?

Anyone else care to chime in?

ARS is right.  Just because you couldn't get 1.25 (or higher) on your house doesn't mean it's not possible, it means your particular market won't bear it.  1.25 might be on the low end of acceptable on the right property, but it would be the exception, not the rule.

*Particularly* with multifamily, you should be closer to 2%, because your expenses will be higher.

I'm looking at duplexes right now for ~55K that should go from 1100 to 1300 per month (550-650 per unit).  I'm holding out for the right $1300/mo unit.  Great cash flow, but also high expenses.

robots4joey

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Re: Duplex Rental Property Case Study
« Reply #4 on: April 16, 2015, 08:22:44 AM »
First off- thanks so much for your insight!

Hmmm... I'm really confused. I can't find anything like what you are finding in your area. Even the property tax appraisal (usually low here) has this property at $78K, so to find one in the $50's would be an absolute dump. I've looked all over the city and suburbs and can't find anything remotely close. (live in Wichita) Perhaps it's because we have had a comparatively low housing bust? (Meaning house values never skyrocketed and didn't fall too much in the crash)

So here's another question- what would be a good projected cash on cash return with all expenses accounted for?

I project about 6.5% using a property manager with very conservative numbers for maintenance ($3K/yr). Is that a lousy return? When you factor in what is paid down on principle every year it averages 15% return/yr. and 100% ROI in 7 years.

My heart isn't set on this property at all, but the other ones I already own so It sounds like I could have done better which is sad.

arebelspy

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Re: Duplex Rental Property Case Study
« Reply #5 on: April 16, 2015, 08:27:03 AM »

So here's another question- what would be a good projected cash on cash return with all expenses accounted for?

It depends on you, your market, and your goals.

I will say that I generally don't bother unless it's at least double digits. Maybe--MAYBE--I'd go down to something like 8% if it was in a really good area and great property or there was some other major motivating factor (e.g. I already owned it, it was it a much higher rate of return when I got it, but values Rose and so the current return on equity was low, but selling would be suboptimal due to reasons such as tax, etc.).

You can easily get a return higher than what you were projecting in stocks, with way less risk and way less work. So why would you take that low return?

You shouldn't. You should shoot for much I return in real estate to compensate you for the extra return interest.
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math-ya

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Re: Duplex Rental Property Case Study
« Reply #6 on: April 20, 2015, 02:06:12 PM »
It's super hard to say if your returns are good or not. Real estate varies greatly by city. I would look at a lot of properties, and buy one that has the best numbers. If having this property is desireable to you b/c of the location. You can factor that into the price you bid. But if you're not already looking at other comparable properties, you could do that to guage a fair price.

zephyr911

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Re: Duplex Rental Property Case Study
« Reply #7 on: April 22, 2015, 11:00:39 AM »
First off- thanks so much for your insight!

Hmmm... I'm really confused. I can't find anything like what you are finding in your area. Even the property tax appraisal (usually low here) has this property at $78K, so to find one in the $50's would be an absolute dump. I've looked all over the city and suburbs and can't find anything remotely close. (live in Wichita) Perhaps it's because we have had a comparatively low housing bust? (Meaning house values never skyrocketed and didn't fall too much in the crash)

So here's another question- what would be a good projected cash on cash return with all expenses accounted for?

I project about 6.5% using a property manager with very conservative numbers for maintenance ($3K/yr). Is that a lousy return? When you factor in what is paid down on principle every year it averages 15% return/yr. and 100% ROI in 7 years.

My heart isn't set on this property at all, but the other ones I already own so It sounds like I could have done better which is sad.

Your cash-on-cash return should beat the stock market (historical average), given the higher risk, lower liquidity, and the need for personal involvement (even with paid management, you still play a role). Personally, if I don't see double digits I'm not interested.

**edit to add**I see Arebelspy already pretty much said everything I did. Consider this an enthusiastic independent confirmation of each point. lol
« Last Edit: April 22, 2015, 11:03:14 AM by zephyr911 »