Rental Question

[LivingAlmostLarge]

Okay here are some details of an investment I'm considering. It fell into my lap today.

$350k to purchase the duplex from coworker. She's divesting herself of all her properties slowly and already sold in 2017 $1.8 in a 4 plexes. She is keeping 2 more duplexs and a couple more homes elsewhere. She's 69 and decided it's time to slowly divest herself 1 per year.

Rents are $1350 and $1500 for each side. She's owned it for 13 years. The roof is 4 years old and I am not sure how old but water heaters and stuff are relatively newer.

Depreciation she's been calculating about $5k/year. It's been cash flow positive for her for years but she bought for $300k at the peak of the last market.

Is this something I could consider? The numbers appear to work well enough for the risk.

She advised me a four plex is what they teach, 2 units for the mortgage and 2 units for buffer. But I am not sure if I have it in me to find a 4 plex. This however could work. Ran the numbers on BP and it's a 6.68% cap rate and 8.59% Cash on cash ROI.

Thoughts?

[Jluke]

I thought Brian had a good summary about the 1% “rule”

https://www.savingadvice.com/forums/468212-post59.html

[bjl584]

What's she asking for the 4 plex?
That would be intriguing, since anything 4 doors and under is still treated like a residential dwelling by the banks.

For the 2 door:
You have a CAP rate of just under 10% if you pay the asking price.
That could be good or bad. It depends on where you are.

Figure conservatively that 50% of Gross Rents will go to expenses to make it easy. So, fully rented, you'll bring in $34K annually. So, plan on putting about $17K a year in your pocket. A little more after the tax breaks.

I'd do some homework on the area to make sure the economy is stable. Make sure the rents make sense. Can you raise them? What sort of repairs does the place need?

Figure on 20% down, so you'll be adding a $350K asset to your portfolio for only $70K of your own money. Not bad on the surface. Just run the numbers. Call around for insurance rates, property management fees, etc. The fees and expenses that most people don't think about is what makes a rental a bad investment.

One other thing to consider with multi-units. Most, but not all, multi-unit properties share utilities. So, there will only be one water, electric, and gas meter for the entire complex. This means that the landlord (you) will have to pay the utilities, since there is no way to know which side of the house is using what. Definitely look into that. It could add significant expense to operating the unit if you have to front the utilities.

I'd probably try to talk her down to get the CAP rate above 10%. $325K makes the numbers look a lot better.

[TexasHusker]

Okay here are some details of an investment I'm considering. It fell into my lap today.

$350k to purchase the duplex from coworker. She's divesting herself of all her properties slowly and already sold in 2017 $1.8 in a 4 plexes. She is keeping 2 more duplexs and a couple more homes elsewhere. She's 69 and decided it's time to slowly divest herself 1 per year.

Rents are $1350 and $1500 for each side. She's owned it for 13 years. The roof is 4 years old and I am not sure how old but water heaters and stuff are relatively newer.

Depreciation she's been calculating about $5k/year. It's been cash flow positive for her for years but she bought for $300k at the peak of the last market.

Is this something I could consider? The numbers appear to work well enough for the risk.

She advised me a four plex is what they teach, 2 units for the mortgage and 2 units for buffer. But I am not sure if I have it in me to find a 4 plex. This however could work. Ran the numbers on BP and it's a 6.68% cap rate and 8.59% Cash on cash ROI.

Thoughts?

Hello I just saw this.

A couple of things: If you bought it for say $350K and $50K of that is the land that the dwelling sits on, you can depreciate the other $300K over 27.5 years. That works out to a little under $11,000 a year.

That being said, I would want a minimum CAP rate of 12% for a duplex, triplex, apartments, etc. That's because a pure investment property is significantly less liquid than a single family residence. Even at 12% I don't know that I would pull the trigger, because there are so many of those deals out there. I did buy a vacation rental recently with a CAP rate of around 12%, but I did so because there is a potential opportunity for significant price appreciation in that particular case, which way enhances the total return.

I think you can do a lot better.

The one thing you might check out is the rents - are they under market for the property? Do you have an opportunity to push them to $1600 or $1700 a month?

If she will take $275K AND you have the ability to push rents to $3100 or more total per month, you're starting to get closer to a good deal.

[LivingAlmostLarge]

uggh TH you just repeated what my DH said. He wants a 10% cap rate and no go with anything less. He said it's not worth the risk to him to consider an investment in RE when we can do corporate bonds or stocks for the same 6-8%.

Well I guess i'm wrong and you both are right.

[TexasHusker]

uggh TH you just repeated what my DH said. He wants a 10% cap rate and no go with anything less. He said it's not worth the risk to him to consider an investment in RE when we can do corporate bonds or stocks for the same 6-8%.

Well I guess i'm wrong and you both are right.

I sent you an email, but unless my math is wrong, you’re at a CAP of 10-ish by giving her the asking price. And that’s just where you are beginning. As time goes on, rents rise, and thus so does your yield.

[Atretes1]

I am looking at one that's listed for 460,000. It has 4 units that rents for 1100 each. my issue is I don't have 25% down and seems lenders want that for 4 units. That being said I would try and talk them down to 440,000.

[LivingAlmostLarge]

Atretes what happened? And $440k with $4400 rent is much better than what I'm looking at.

[TexasHusker]

Atretes what happened? And $440k with $4400 rent is much better than what I'm looking at.

A multi-unit CAP is usually going to be higher than a single family residence or duplex.

A good rule of thumb is: More CAP, more CRAP.

Lots of that with multis.

[Atretes1]

Atretes what happened? And $440k with $4400 rent is much better than what I'm looking at.

They took it off of the market. I only have funds for something that's half that price now anyway.