Buy or build?

Question

I have been thinking about obtaining a duplex to live in and rent out the other half as income. I do not know if I should try to buy on or build one. I know a builder who does duplexes, but buying one would be so much faster. The problem is that the ones around here that I've seen for sale are junky and I've noticed real estate agents are not taking me that seriously. What would be some good advice any of you could give about this? I'm 26, a female, and clueless (working on this part!). But I want to have income properties so badly. I just want to be smart about how I start.

Michael Wentzel · Answer

@Katie Barton Welcome to BP! You came to the right place to learn. Spend some time in the forums and definitely listen to the podcasts. I've learned a ton from those two resources.

Generally speaking, renovating is much cheaper than building. I haven't done any new builds, but my guess it would be as complicated or more complicated than buying a duplex that needs some work and hiring some contractors to fix it up.

It is great that you're stepping out so young. Spend some time on education here on BP. Meet with multiple lenders and Real Estate agents to continue learning. See if there are a couple investors locally who would chat with you over coffee. Then go for it. Buying a duplex and living in one-side is one of the easiest and safest ways to get started in Real Estate investing.

Mike

Katie Barton · Answer

Thank you so much for your reply! I think that you're probably right about building being maybe too complicated for the first one. It's nice to hear of your success though in 4 years. I know the market where I am is right for duplexes and is growing. Can I ask how you bought your first one? I'm not joking when I say that no one I've talked to (real estate agents) is taking me seriously.

Elizabeth Colegrove · Answer

Welcome!

As a 27 year female, who got started as a clueless 23 year I get your frustration :)

We are buy and hold investors who self manage! We got started with single family home as duplexes didn't make sense in our area. While having someone build one, is a great idea. there are so many factors, like zoning, location, etc that it would make me nervous for doing it on my first deal!

Have you thought about buying a single family home and renting to the rooms. Spending that time getting your feet wet and looking into buy a duplex as your next primary residence renting gthe other side out?

We have done well leveraging our W2 incomes (and the houses that come with it) while investing in the evening and weekends.

Let me know if I can help! Good luck!

Joel Owens · Answer

Hi Katie,

You would need to analyze the area that you want to live in what the cost to build new is to construct along with acquisition costs per sq ft versus buying something existing.

Example if rents are close to equal for new versus existing for a 2 bed unit then if you can buy existing for 60 sq ft and 10 ft improvements for 70 sq ft all in versus new construction at 120 sq ft then you can buy existing for less than replacement cost.

Construction loans lend at 70 to 80 percent loan to cost so you have to put down more money as new builds carry more risk than existing product.

If you were going to buy a duplex you might as well get a quad instead. 4 units if one goes vacant you are at 75% occupied versus 50% for a duplex so you have better breakeven occupancy to service the debt ( mortgage ).

If you have limited funds going FHA might be the way. You can get gift fund from your parents, family etc. as a down payment. You can get gifts for conventional but usually you have to match the down payment and amount down is more.

So for instance a quad at 80k a door is 320,000. FHA just recently dropped the rate down on mortgage insurance premium which helps and the amount down I believe is 3 to 3.5% down.

You need to have a mortgage broker pull your credit and give you an idea with your savings and job with possible family help on what range property you could buy.