Flipping a duplex?

Question

I’m about to close on a great deal on a C class 2/1 duplex. I was planning to keep it for a rental but I found another great deal and one of them will need to go.

It’s empty now and really doesn’t need much work but I plan to polish it up some first. I already have a tenant waiting to move into one side. Do I want to rent the other side out so it will appeal better to investors or do I want to make one side slightly nicer and leave it empty so it will appeal to an owner occupant that’s interested in it doubling as an investment? Leaving it empty would also allow me to keep one side looking nice and always available for showings.

It’s on a street with approx 30 duplexes in an otherwise single family area.

Its not financed so carrying cost are low.

Any thoughts or experiences?

Joe Delia · Answer

Depends on your market but who's your buyer?  An investor or an owner occ who rents the other side?  Whoever your agent is should have that answer for you and a suggestion.  My guess is being that, and i'm guessing, college station, a college town, that an investor is going to be buying it.  I disagree with jake that duplex owners don't like inheriting tenants.  People don't like inheriting BAD tenants.  If you have a signed, solid, lease and rental history with established payments, i think your chances of a sale are much higher, plus you're cashing flowing.  A $700 profit vs carrying for $700 is a $1400 swing a month.  Just my rambling thoughts.

Ryan Webber · Answer

I always rent multi's when I'm trying to sell them.  It maximizes your profit with the rental income coming in.  Multi's will naturally take longer to sell because there is a smaller buyer's base.  Why not maximize your cash flow in the meantime.

As for the appeal to an owner occupant if one side is vacant, you are dealing with an even smaller buyer's base in that situation.  An extremely small percentage of buyers will be looking to do that.  So small of a percentage that you should not cater around it.  The vast majority of the buyers for a duplex are non-owner occupant investors that are buying it for cash flow.

In my extensive experience selling smaller multi's to investors, a leased property appeals to a larger investor group than one that still needs to be rented.  Its a turn key income producing asset.  That absolutely adds value.

I also disagree with Jake that most duplex landlords don't like inheriting tenants.  If you've done basic screening on them, a paying tenant is a paying tenant.  My cash flow investor buyers love stuff that is already rehabbed and rented.  All they need to do to start cash flowing is go introduce themselves.

Now make sure you are using strong leases (you should normally be using an Apartment Association lease) and that you are asking market rent.  Putting tenants in there with below market rents and crappy leases is not added value.

As for showing the property, I make sure that only serious buyers get inside to bother my tenants.  And I've had very few problems showing rented properties.

Mike Jakobczak · Answer

Yea I say keep one unit empty.  Since most buyers will want to walk-through the units.  Having the units full will make it harder to show and may even upset your current tenants.  I know if I was renting and had showings everyday, i would want to start looking for a new place.

Casey S. · Answer

Jake, thanks for the response. So in your opinion a duplex sells easier when empty.

Anybody else have any thoughts on this?

Im leaning towards renting one side and leaving the other empty.

Jake Kucheck · Answer

Typically you want to make as much as possible on a flip.

So... if the rental income less the carrying cost outweighs the increase in how long it will take to sell it, and any incurred price atrophy (from the units not being available to show or showing as well), then do that.  If the rental income less the carrying cost does NOT outweigh these things, then do the rehab to both sides and sell it.

My hunch is that you will be able to sell a clean, rehabbed duplex for about the same as a clean, rehabbed duplex with tenants in it (since there is no real potential for value-add and most duplex landlords don't like inheriting tenants), so if you're going to do the work, you might as well sell it as quickly as possible (vacant).  As a flipping company, we view putting tenants in a 1-4 as a last resort, although the equation changes drastically for 5+ doors.