Will I Basically Break Even on a Duplex If I Live in One Side?

Question

Here goes.  This is my first forum question and I hope it's not a dumb one.  I also hope I posted this in the right area.

So, I would like to buy a duplex as my first purchase.  I live in Iowa where there are some duplexes that go for around $150k.  I plan to put 20% down to avoid PMI and then actually pay it off in 2-3 years (I keep a very strict budget and live well below my means).  I understand this is not the common approach.  I know that everyone suggest using "other people's money" but I don't really want to carry a mortgage for 30 years.

My confusion and question is about the 50% rule how much profit would be made if I pay off the duplex in full.

From what I understand, the 50% rule says that roughly 50% of all rental income will go towards expense ABOVE the mortgage.  So, if I don't' have a mortgage BUT I'm living in one side, will I basically be breaking even?  Per the 50% rule, if I rented BOTH sides, I would use the income from one side for expenses and I would be able to keep the income from the other.  But, if I am living in one side, and the other side goes for expenses, then I think I am breaking even.

I know we are speaking in generalities until I find a duplex that I can run actual numbers on but I am wondering if a duplex would really be that profitable once it is paid off?  I think I may be missing something because this doesn't really seem to net very much profit.  I am a complete newbie here so I am sure I have overlooked something.  I would greatly appreciate any thoughts anyone might have.  All books I read assume someone is carrying a mortgage but I haven't come across much regarding paid off properties.

Thanks,

Mike

Ryan Parnow · Answer

If you're living in one side, you're not really breaking even. You are forgetting the fact that you would have to pay rent to live somewhere else.  Consider that cost avoidance as part of your profit as well.

Mike Brown · Answer

Thanks for the reply Samantha!

My thinking, at least at the moment, is to pay off the first mortgage within 2 years.  Then, take out a new mortgage to buy a second duplex.

Per the 50% rule, one side will cover expenses and the second side will go toward the mortgage.  I will pay down this second mortgage faster by adding my own work income to income from the tenant's rent.

I plan to continue this until I have 5 properties paid off.  The 5th one would be paid off in 8.5 years.  At that point, I could quit my job and replace my income with the income from the properties.  I could continue this process and slowly grow my income while only maintaining one mortgage at a time.  Eventually, I could buy one house a year and not even need to take out a mortgage.

I understand the math of getting as many properties as possible with as much debt as possible.  But there seems to be so little income generated after expenses and mortgage.  People talk about $100 per door (for 30 years).

If I'm getting $800-1000 per-side/per duplex and they are paid off, I would have $4000-5000 per month take home (the other half going towards expenses).  $100 per door would require carrying debt on 40-50 duplexes to bring in the same amount as my 5.  Yes, in 30-years, 40-50 duplexes will bring in a LOT more than my 5.  But I can also buy and pay off a lot of duplexes in 30-years.

I may be looking at this all wrong but I feel I can accomplish my goal of quitting work and enjoying my life with little risk to worry about along the way.

Samantha Klein · Answer

Do you not want to continue investing after you find a duplex to live in? If you do want to continue purchasing, it would strongly be in your favor to carry some debt obviously as long as you run accurate numbers and can cash flow. I know you don't want to carry a mortgage but your actually losing alot of opportunity value by accumulating dead equity. A common strategy is to purchase some properties with 20% down, say 5 or so and then if you really want to have no debt then you can snowball the debt with all of your cashflow. I'm one of those refi til you die because having too much equity to me is losing opportunities and money.