Cashflow and the duplex next door

So, I’ve been biding my time, not really thinking too seriously about buying the duplex next door (but thinking about it, nonetheless). It went up for sale a month ago, and the sign is still there. I haven’t seen a great deal of activity there (both units are currently vacant), although they do periodically mow the grass (not really as often as they should when trying to sell the place, however.). All of this cashflow 101 playing has gotten me wondering a little more seriously about it…. and doing the math over again.

So, they’re currently asking $219,000. If I were to finance all of that, and get, say, a 7% loan, the mortgage would be $1457. Plus roughly $250 for taxes, let’s say $100 for insurance (I need to research costs for insurance on a non owner-occupied property. I know it’s more, but I don’t know how much more). Plus $80-ish for the water/sewer/trash bill. That adds up to $1887 in monthly costs (not including repairs/maintenance). To cover that, I’d need to be able to rent both top and bottom (both two-bedrooms, but the bedrooms are small, and the place isn’t in the greatest of shape), for $950 each. I’m not sure that that would happen. I’m doubtful that that would happen, actually.

From the info on the assessor’s website, I know that the current owner bought the duplex 5 years ago for $183,000. And they’ve had terrible luck with it, it’s been empty more than it’s been full. If I were to put in an offer for 183, the mortgage would be $1218/month. This brings the total monthly costs down to $1648. If I were able to rent each unit for $850/month, that would cover the rent, with about $50/month to spare. Not great cashflow, but cashflow nonetheless. If I were able to rent them each for $900/month, I’d get $150/month cashflow. I’m not sure that I could get that, however. The current landlord is clearly in over his head, and not very good at managing the property, but I also think that it’s not the kind of place people are necessarily clamoring to live in. It’s in decent shape (last I saw, anyway), but the bedrooms are small, there is carpet in some rooms (vs. hardwood floors), and the yard definitely needs some work. (As does my own).

If I were to put in a total lowball offer of $170,000, I think I could do very well. The mortgage would be $1131/month, with total expenses equalling $1561. If I were renting out the top and bottom for $850 each, I could cashflow about $150 each month. If I were able to rent them for more, it would be that much more profit.

Also, I’m figuring these mortgage payments based on a 7% interest rate; I have good credit, but not a ton of equity in my house at the moment, so I’m not sure that the banks would give me today’s best rate (currently somewhere around 6.25%). When I bought my first duplex, I made the mistake of figuring out the numbers based on the “best” rate that everyone was posting, but it turned out that I couldn’t get it, due to the debts that I already had on the table, and my loan to income ratio. This time around, being self-employed, I don’t expect that I would fare all that much better.

Outstanding questions I need to resolve:
1) What can I qualify for, loan-wise
2) What would insurance cost me for a non-owner-occupied duplex?
3) What kind of shape is the duplex in, and what would be required for repairs?
4) Oh, and how badly does the owner want out? How low of an offer will they accept?
5) How much cashflow do I need to make the investment worthwhile?

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3 thoughts on “Cashflow and the duplex next door

  1. Hi there. I believe you are on the right track with your questions to yourself regarding this duplex next door to you but I would make a few suggestions, for what they may be worth to you.

    1. Don’t forget an allowance for vacancy, maintenance, and repairs in your calculations. With cash flow at $50 for one of your scenarios, you’d might end up break-even on your proposition.

    2. Definitely get a sense for what your loan would be since with these tight cash flow margins the rate will make a difference in your monthly profitability (you’ve already got that covered, but you want to know that rate and monthly payment).

    3. Your last question is what I believe to be the critical one. If you think about it, you will have to come up with some percentage of the purchase price as a down payment, which will constitute, along with closing costs, your actual out-of-pocket investment in the property. So, if you had to put, say, $10,000 down to make this deal work, you might want to ask yourself what rate of return would you demand from an investment in order to make it worth your while to put those dollars in there. If the return is 5%, you can get that right now opening up an Internet-based bank account with little to no risk.

    Of course, your investment strategy may involve buy-and-hold where your objective is to grow your equity in the property while someone else pays for it and reap the reward of increased value (which, of course, is not guaranteed) and a nice income when the mortgage is paid off. Just keep in mind that you may be working at break-even on those units for a long time to come and will have to withstand vacancies, etc, while operating it at a low cash-on-cash return.

    If you want, say, 10% or better return, work the numbers to get that return on your Excel spreadsheet (I can send you one I use if you want) then base your offer on that rate of return for your cash investment and be prepared to walk away from the deal if the owner doesn’t agree to it. From your posts it sounds like this owner wants out of this property and you can solve his problem for the right price. Heck, I’d even show him the numbers and explain why his price makes no sense; after all, you’re an expert in this area since you live next door and operate similar units in the same neighborhood.

    Good luck!

  2. I thought that the insides required major work in this property. Given that you know the owners are very motivated, I don’t think a lowball offer would be insulting to them.

    If you would like to take a shot at it, you should call your insurance company and find what the exact cost will be. Call your mortgage broker and find out what your rate will be. Based on those numbers and your probable rent, come up with a max. purchase price.

  3. While the idea may seem tempting, after it is right next door to your property, I figured I would throw this question out to you. What about venturing out into other kinds of investments? You seem to enjoy being a landlady, but has it become somewhat of a hobby for you? Its always smart to diversify your investments — take a look at the amount of people who bought multiple properties during the boom and are now paying the price. Not saying it’s a bad idea, but I think Andrew brought up some good points to consider as well.

    Wow, I just noticed this post is about 3 years old… so tell us, what did you decide??

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