Author Topic: Should I buy this duplex?  (Read 2627 times)

Stachetastic

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Should I buy this duplex?
« on: December 07, 2015, 06:42:31 AM »
We currently own one duplex in our small town that has had mixed results. It's an up/down and we've had difficulty finding and keeping tenants in the upstairs unit. (I know, this is the opposite of what a lot of other cities see.) Anyway, because of this, I've been hesitant to purchase another multi family. We now have a friend who purchased a side by side duplex to flip and has reduced the price to get rid of it before winter. He has no interest in landlording, and just wants to unload it. He purchased it for a steal due to a fire, and has completely rehabbed it--new kitchens and baths, all new flooring, new water heaters, and furnaces are 6 years old. It also has all new electrical in one unit. I've had this friend do work for me in the past and he is very thorough--he has also flipped many other properties and is very good at what he does. Here are some numbers:

Asking price: 55k
Prospective rents: 500-600 per unit (He said he has turned renters away bc he wants to just sell and be done with it, so both units are currently vacant)

I'm not sure what utilities owner would be responsible for. Obviously HVAC units are separate, but I'm guessing owner would pay water and sanitation. Taxes and insurance would likely run ~$200/mo. total.

arebelspy

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Re: Should I buy this duplex?
« Reply #1 on: December 07, 2015, 07:44:03 AM »
Why is he having trouble selling it? Typically that indicates it's overpriced.
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Stachetastic

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Re: Should I buy this duplex?
« Reply #2 on: December 07, 2015, 07:47:21 AM »
Why is he having trouble selling it? Typically that indicates it's overpriced.

I agree. There isn't a crazy market around here for multi family properties.  He just reduced asking price from $74k, which I do think was a bit high. We weren't interested in it at that price, despite it being one of the nicest multi families in our town.

jnc

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Re: Should I buy this duplex?
« Reply #3 on: December 07, 2015, 07:55:18 AM »
You can use iamlindoro's spreadsheet posted here: http://forum.mrmoneymustache.com/real-estate-and-landlording/evaluating-a-rental-property/

You have to do a bit more research, find out about property taxes, more accurate estimates regarding common utilities and other maintenance, etc...

zephyr911

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Re: Should I buy this duplex?
« Reply #4 on: December 08, 2015, 10:59:59 AM »
Rent is ~2% of price, so a high gross cap rate, but as you say, you have a hard time keeping your other one rented. Higher vacancy rates mean lower net cap rates, which reduce values. If your experience is typical, you already have your answer. What's the economy like in your town? High unemployment? Low wages? High transient population due to instability in the job market?

coopdog

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Re: Should I buy this duplex?
« Reply #5 on: December 08, 2015, 11:59:47 AM »
Rent is ~2% of price, so a high gross cap rate, but as you say, you have a hard time keeping your other one rented. Higher vacancy rates mean lower net cap rates, which reduce values. If your experience is typical, you already have your answer. What's the economy like in your town? High unemployment? Low wages? High transient population due to instability in the job market?


2%? I'm assuming he means $500/unit/month which would mean gross rents of $12,000 a year. That's over a 20% cap rate. But not having it rented at $500 a month is a bit of a concern. In general, a vacant income producing property should be marked down for the risk and headache factor of getting it leased and stabilized.


jnc

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Re: Should I buy this duplex?
« Reply #6 on: December 09, 2015, 03:54:01 AM »
Rent is ~2% of price, so a high gross cap rate, but as you say, you have a hard time keeping your other one rented. Higher vacancy rates mean lower net cap rates, which reduce values. If your experience is typical, you already have your answer. What's the economy like in your town? High unemployment? Low wages? High transient population due to instability in the job market?


2%? I'm assuming he means $500/unit/month which would mean gross rents of $12,000 a year. That's over a 20% cap rate. But not having it rented at $500 a month is a bit of a concern. In general, a vacant income producing property should be marked down for the risk and headache factor of getting it leased and stabilized.

He's referring to the 1% (or in this case 2% rule).  At $500/mo that's $1000/mo for the 2properties which is a bit less than 2% of the purchase price. That's pretty good.

As you say, the risk is whether you can rent it out at that price... When i've bought turnkey investment properties, they typically offered a 1 year rent guarantee so they covered the rent in case until they had a tenant in place. I'm not saying your friend should do that, but maybe you can structure the deal so that it won't close until the 2 units are rented. Just a thought.

Best of luck.
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Stachetastic

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Re: Should I buy this duplex?
« Reply #7 on: December 09, 2015, 05:51:50 AM »
Thanks all! We've decided against moving forward after speaking with our mortgage broker. My husband has had some employment challenges this year that would make getting approved very difficult. Which is good, since we were really on the fence with this one. Thanks again for all of your wisdom!

arebelspy

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Re: Should I buy this duplex?
« Reply #8 on: December 09, 2015, 06:26:56 AM »
Probably a wise choice.  In real estate, if you're on the fence, better not to jump--it's a big commitment.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.