Please help me game out a cost for a duplex

[Out-to-Lunch]

I know we have a lot seasoned real estate investors aboard, and I would love your input. I am not looking to invest in real estate myself for profit; rather, I am in competition with RE investors for a property to live in, and I am trying to figure out how much they will be willing to offer.

I am looking in a nice neighborhood (which is where I currently live). Respectable, upper-middle-class families, good school district, etc., which I think that means that an investor will tolerate a lower cap rate. (Correct?)

The property I am looking at is a duplex, and I would estimate the rents to be about $5300 ($2800 + $2500). The taxes are about $14k (and probably will go up to $15k after the sale). The asking price is $750k, but I expect it to go for closer to $800k. It is an older (1927) property (as they mostly are here); it is solid, but lots of wear and tear on properties this age. You could easily put tens of thousands of dollars into it, or, instead, just ignore any deferred maintenance for the time being.

Not taking maintenance, insurance, or vacancies into account, this would imply a NOI of ~$49k (just taking rents - taxes). I am not sure what to include for maintenance in a more refined calculation. (2% per annum? $1/sqft/annum?)

And perhaps most importantly, what cap rate will my competitors be looking for?

Thanks for any thoughts on my not-very-well-posed question.

 

[OldShooter]

All that good analysis is close to being completely irrelevant. The price question is "What is the market?" Your analysis will help you decide whether you want to play the game or not.

 

[HI Bill]

I would start by looking the value up on Redfin and Zillow (inputting the exact address).

Most landlord investors want to make 8-12% on their investments if they're not counting on out-sized appreciation. This website describes the process of calculating costs and net cash flow after expenses. https://learn.roofstock.com/blog/how-much-cash-flow-good-for-rental-property

Once you determine the costs, you can calculate the maximum estimated sales price. Then factor in the property condition and any required repairs to determine your maximum price. Also, try to figure out the market's direction in your area. If it is in an upward spiral, you may well want to pay more than market value, just to get in before you get priced out.

In my current primary residence, I stretched in 2020 for a $1M property, only to see it appreciate 70% over the next two and a half years. I couldn't afford the payments now, especially with the higher interest rates.

 

[NgineER]

I know we have a lot seasoned real estate investors aboard, and I would love your input. I am not looking to invest in real estate myself for profit; rather, I am in competition with RE investors for a property to live in, and I am trying to figure out how much they will be willing to offer.

And perhaps most importantly, what cap rate will my competitors be looking for?

We have a handful of properties within 2 miles of where I live. I haven't ventured farther than that due to me not knowing enough about the neighborhoods, market trends etc. Also, because I want to be able to drive by and check on them and being conservative we've chosen to stay very local.

The RE market is very location dependent and unfortunately I can't tell you much about your area.

This is what I use for calculations...
I check rents using rentometer.com to see if the rent I'm planning to set is reasonable.
I've never paid more than the 1% rule (but that is 2x the 2% rule that many RE investors talked about 7-10 years ago as the golden rule). 1% rule is that you won't pay more than 100x the monthly rent and then it should cash flow for you.
Normal assumption - 50% of rent will go to management, vacancies, taxes, maintenance and capex. I manage myself and count 40% as being the number I can count on going to expenses on average (can vary widely year-to-year).
Then I'd like to make a couple of $100/door per month in cash flow and mortgage rates and purchase price dictates your profit...
I've also estimated but not counted on 1-2% appreciation annually. This has turned out to be very incorrect, it has widely surpassed my expectations.

Some investors can stand to be cash flow neutral or negative counting on massive appreciation instead.
The problem with RE is that you have the gamut of investors - some are speculating and can make out like bandits, or go bankrupt, whereas others remain mom and pop shops that grows slow and steady.

You are competing with the gamut of investor types and the amount of money they have. Some get mortgages and others by cash.

There is no easy answer to the question you posed, but hopefully I gave you some more things to think about.

You might do well with a letter too stating that you intend to live in this property, some investors like myself would like to see some of the old ladies that were broken into multifamily buildings during the depression to be returned to their former glory.

 

[FLSUnFIRE]

My thought is forget your competition. It's an asset/purchase, what is it worth to you? If you really want it and it's not about an "investment" then offer the full value it is worth to you and you get it great, if not, it was not available at what you determined to be the value. Being aware of the market and the likelihood your offer may be accepted is useful for expectations but that's about it. If you really want it at any cost*, make an offer with an escalation clause to match any bona fide competing offer received.


* or put a cap on it if not "any" cost


FWIW, I am in a townhouse surrounded mostly by apartments as far as residential goes (both existing and about 3x existing planned/under construction in a booming city so competition will increase in the rental market as these new units hit the market). My neighboring unit was purchased recently, they put some work into it (at least all new kitchen appliances), and listed it for rent at 0.5% of the sale price/mo. I have no idea how this "investor" is making any profit (or will even manage positive cash flow at that rental rate unless they paid cash or have a balloon loan) but the ROI would still be minuscule at that rental rate. They could be counting on appreciation but the area has already appreciated dramatically so I don't expect double digit increases in the short term. I guess it's possible it's someone that eventually wants to move in as their residence but then I don't know why they'd upgrade the appliances which were all working before they planned to move in. IMO, the asked rent is a bit low for the market and if I was in the market I'd seriously consider it. Fair rent is probably about .7% of the recent sale. I was curious and just looked at the listing again and it's clearly being listed and managed by a property management company so there's that drag on return as well! Wow, definitely a weird property in a weird market.

 

[LateToFIRE]

As others have said, real estate is extremely location dependent, and there are many types of investors, each with different criteria. So, your competition is going to come from just about anywhere. In my big city market, often the highest bids are not from investors, they are from very high-income mid-career professionals looking to reside in the property themselves (and often backed up by family money). So, really just comes down to what's the market, what's sold nearby, and for how much. You have to know the market, study the market, and everything that has transacted in the past couple of years.

 

[Winemaker]

I always used 7 as a rent multiplier. Total rent *7*12 months=Cost. It worked for me buying and selling. You have to look at the property like a stock or bond; you are buying a stream of cashflows. It has to cashflow, you don't pay someone else to live in your property.

 

[Out-to-Lunch]

I would like to thank all of you who gave helpful and thoughtful suggestions, both of the qualitative and quantitative varieties.

We did make an offer. Fingers crossed.

 

[Out-to-Lunch]

Update: Our offer was accepted. They had "multiple, multiple" offers. Ours was not the highest offer, by a few thousand bucks, but it was the cleanest. On to the next phases!

 

[OldShooter]

Update: Our offer was accepted. They had "multiple, multiple" offers. Ours was not the highest offer, by a few thousand bucks, but it was the cleanest. On to the next phases!

Congratulations. Just out of curiosity, was the offer based on the outcome of the calculations you were doing or was it based on your assessment of what the market was?

 

[Out-to-Lunch]

Congratulations. Just out of curiosity, was the offer based on the outcome of the calculations you were doing or was it based on your assessment of what the market was?

Yes.

Those calculations were part of my making an assessment of the market. Houses not being commodities, and all.

 

[l8_apex]

Prices are out of whack in my town. I'm renovating a small duplex of my own right now. Built in the 90s, 1100 sq ft per side 3 bed 2 bath. It's a piece of crap, it was made very poorly. Rent is $2400 per side. Selling price will probably be $800-$850k as 3br condo units in a nearby complex are $400k.

I'm going to put $50k into replacing some exterior siding and windows and a full gut reno of one interior.

There is no freakin' way that the sales price is justified by the rents, it makes no sense.

 

[OldShooter]

... There is no freakin' way that the sales price is justified by the rents, it makes no sense.

In Olden Times when I was doing real estate, it was the duplex valuations that wee the hardest to deal with. The reason was that part of the market was buyers who intended to live in one of the units and many lifestyle intangibles were in play. From fours and bigger the valuations tended to gravitate towards numerical analysis like the OP was emphasizing.

 

[ERD50]

I know we have a lot seasoned real estate investors aboard, and I would love your input. I am not looking to invest in real estate myself for profit; rather, I am in competition with RE investors for a property to live in, and I am trying to figure out how much they will be willing to offer. ....

This strikes me as a very convoluted way of looking at it.

An investor, like anyone else, will only pay as much as the market will bear. You can go through all those calculations, and even if they were in agreement with an investor's numbers, the end result would be - the investor decides that market price makes it attractive and he makes an offer, or it's not attractive, and he doesn't make an offer (or a low ball one, not really expecting a bite).

That doesn't sway the price one way or the other.

Just look at comps - that should tell you what you need to know.

-ERD50

 

[Letj]

Prices are out of whack in my town. I'm renovating a small duplex of my own right now. Built in the 90s, 1100 sq ft per side 3 bed 2 bath. It's a piece of crap, it was made very poorly. Rent is $2400 per side. Selling price will probably be $800-$850k as 3br condo units in a nearby complex are $400k.

I'm going to put $50k into replacing some exterior siding and windows and a full gut reno of one interior.

There is no freakin' way that the sales price is justified by the rents, it makes no sense.

Are you doing the work yourself? $50K for windows, siding and gut renovations of an 1,100 square foot apartment seems unreal. I am doing a cosmetic renovation for a small 1,200 sf house with a couple upgrades and it’s costing $65K including appliances.