Should I Buy This Duplex?

I recently found myself in an advisory roll for a couple individuals, Eric & Jolene. Complete strangers to me but Eric & Jolene reached out for some advice on purchasing their first duplex, happy to provide. To my knowledge these newbs at real estate investing don't know one another as one lives in North Carolina, the other in Minnesota, but had very similar, scary similar, scenarios.

Eric (NC) & Jolene (MN) were analyzing their own duplex with the idea of living in one side while renting out the other side. They both wanted to cash flow $100-200 per unit but neither could calculate their numbers to work and fit their investment criteria, but why?

Each presented their case. "Are my expenses, utilities or taxes too high? Have I over estimated my vacancy expense?" Typically I find utilities and taxes as two expense categories that really drive down cash flow, so they both were on the right track. They have done some homework. Property taxes, not much anyone can do about them. Possibly something you can do about utilities via bill back to the tenants but you have to be sure your competition does this as well and/or how that will affect your rental income.

Pro Tip: If a property is master metered, the most economical way to bill back utilities to tenants is through RUBS - ratio utility billing system. Be sure your state statutes support RUBS and it will save you thousands on sub-metering a master metered property.

Next case point, both Eric & Jolene presented, "Rent is not up to market rates on Unit B. There is a long term tenant of 10+ yrs that I know I can go up on but even when I do that, I still don't hit my $100-200/unit criteria."

My Advice: Your goals are wrong.

Both Eric and Jolene were analyzing their properties as if they were living in them, meaning they were missing out on revenue from one unit, meaning 50% economical vacancy...all the time. This wouldn't allow them to hit their investing criteria but if they wanted to live in one side of a duplex and rent out the other, they have to look at it a different way.

Here's what I told them:

You have to make a decision on whether this property is the right property for you. You have to decide if you want to use it as your way of starting to invest in real estate, not that it will hit your investing criteria initially but you know it will once you move out. You have to decide if your goal for this particular property is not to initially cash flow to your criteria, but allow you to dive into real estate investing and eventually steam roll you into additional units.

Both Eric & Jolene currently owned homes, paying $1200-$800/month respectively in mortgage payments. To gain perspective, through our conversation they realized that their goal, as least for this property, was to cut their housing expenses down to $200/month. A reduced mortgage payment plus the second unit's rental income brought their housing expense down by $1000-$600, respectively. The delta difference, that $1000-$600, they would then start saving for a down payment on their next rental property. By doing this, in less than 24-36 months, both will have enough money saved for a down payment on their next rental property.

Setting goals is highly important but setting the right goals is important-er!! I did that one for my 9th grade english teacher :)

In my 10 Step Guide to Buying and Holding a Small Multi-Family Rental Property we discuss this very thing. Step 1 is completely dedicated to defining your goals and more importantly, your purpose for real estate investing. Once you've truly discovered what those two are all about, real estate investing becomes clearer. In Step 2 we'll create your investing criteria that'll act as your guard rails when analyzing opportunities.

Have a question? I'm happy to help.