First post after lurking here for months. By way of background, our current savings rate is around 60% of take home pay. Could use some improvement. Spouse and I are in good steady, high paying jobs. Both of us are engineering doctorates, so reasonably good at math. :)
We came across an investment property that is currently asking $295,000. It's a duplex with ~ 2600 sqft, 2 car garage, 1950s construction. The rent is $2200 ($1100 per unit), and the area is a high-demand one because of proximity to several college campuses, downtown, transit (new light rail), and close to everything with a high walkscore. Properties in the area seem to go for about 77% of the listing price. Long-term tenants, with one tenant living in the area for over 10 years. We've lived as tenants in the area in the past, and properties do get rented pretty quickly. The owner seems to have done the following repairs/updates:
High Efficiency Furnaces installed in 2011
Property reinsulated with R19 used in all walls and R49 in the roof
Weather stripping added to all windows throughout property
Updated electrical to 100 amp circuit breakers
Roof Replaced in 2008
We are cautiously interested in this property. If we plan to make an offer, it would be no more than $230,000 (max) based on comps in the area (more on that in a minute). If we do end up buying, we would plan to put 25% down. Lender quotes investment property mortgages of 3.625% for a 15 year mortgage. With taxes and insurance, the monthly payment would work out to about $1750.
The owner's (does not live there) current expenses:
Taxes: $325 monthly
Insurance: $87 Monthly
Water/Sewer/Garbage: $125 monthly
We are currently living about 35 miles from that area. But we like the neighborhood enough that eventually want to move there (after 8-10 years) after reasonably close to FIRE (unable to move now because of job situation). If we do, we might wind up living in one and renting out the other. Our philosophy has been that we're having our tenants pay our mortgage until we're ready to move in.
Assuming we'd hold the rents somewhat steady (not raising the rent unless the tenants move out), does this seem like a good investment? My estimates lead to about 7-8%, yield potential once paid off. In other words, comparable yield to low cost index funds over a long period of time. No real ROI incentive over stocks/index funds. A decent incentive is the diversification of portfolio. Can assume property to appreciate and rents to increase at about the same rate as inflation.
Now, on the comps. Only a couple of rental properties in our comps. The rest are just regular single family homes, and somewhat skew the estimate to a higher price. Tax estimate is based on a home value of about $180,000. Unless we do an appraisal, we probably don't have a good estimate to base our offer price on so we're relying on the fact that properties sell at 77% of listing price in the area, 1% rule and comps, while considering all the repairs/updates seller recently did.
Would you consider or pass this property? Appreciate any insights.