What are your thoughts? Looking at buying an upper/lower duplex and need some input

31 Replies

Here's the situation:

I'm looking at possibly purchasing another investment property. It's an upper/lower duplex. It's a big place, about 2,000 square feet. The lower unit is a 2BR 1 Bath and the upper is a 1BR 1 Bath.

Here are some things I like about the property:

`It's old, but in good shape. The siding was updated a few years ago and overall, it seems like it has been relatively well cared for.

`The price is quite good and the taxes are low. My total mortgage with taxes and insurance would be about $450 or so.

'The gross rents are $1050/month, so clearing $600/month would be great.

'It can be converted back to a single family home with very little to no work if it needs to be.

Here are some things I DO NOT like about the property:

`It's a conversion from a single family home. My other duplex is a true side-by-side duplex with garages separating the two units, which is a very nice feature. Most duplexes in my area are single family conversions because all of our new construction seems to take place in the country. I live in a pretty rural area.

`There is only one furnace that heats both units. I believe the thermostat for said furnace is in the lower unit, meaning they control the heat. I am going to look at the lower unit this afternoon and will confirm my suspicions then. This setup seems weird to me. I would imagine the best way to deal with this would be to program the thermostat for specific heats and not allow the tenant to control it, but maybe you guys have some better ideas.

`The landlord pays for natural gas, water and sewer. The tenants are responsible for their own electric costs, however. I live in an area where our winters are stupidly cold. Heat can get pretty pricey here. I estimate it will cost me $100/month in natural gas charges and likely $50-60 in water/sewer charges so my $600/month just went to $450 pretty quickly.

What are your general thoughts? I think my biggest hangup is in paying the utilities and there only being one furnace. Have any of you experienced this type of situation?

Thanks!

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@Ethan Blue

Own some of those, but they are not my first choice, SFH detached, the townhouse side by side, then up & down.

We've converted LL paying heat to tenants paying heat. The metering part should be easy, separating the may be more challenging. If you plan on holding a long time having the tenants pay their own heat can pay off, you can actually charge less rent, and any heat costs increase comes from a third party not you.

Thanks for the reply.

Yes, this is a long term buy.

I'm also looking into some single family homes. I tend to be more interested in those as well. My biggest hang up on the single family market at this point is that I just can't make as much money, though the potentially higher quality tenant and fewer maintenance calls may be worth that, I don't know.

On the single family home I am looking at, I would clear about $250-$275. The duplex would be closer to $500.

@Raymond B.

By clearing I just meant taxes, insurance, mortgage subtracted from gross rents if the property was full though admittedly that was a bad choice of words.

That being said, I was unaware of the 50% rule, so that link was very helpful and I appreciate your input.

In the past I have also heard the argument that sometimes duplexes can be beneficial because the likelihood of both units being vacant at the same time is relatively low.

Do you guys have any input on that?

Thanks again for all of your input.

Originally posted by @Ethan Blue :

By clearing I just meant taxes, insurance, mortgage subtracted from gross rents if the property was full though admittedly that was a bad choice of words.

That being said, I was unaware of the 50% rule, so that link was very helpful and I appreciate your input.

In the past I have also heard the argument that sometimes duplexes can be beneficial because the likelihood of both units being vacant at the same time is relatively low.

Do you guys have any input on that?

Thanks again for all of your input.

Hey Ethan,

I still have 1 hangover prop in WI (Milwaukee area) right now. It has good insulation and brand new dual pane/argon filled windows but with this past winter the NG bill was higher than $100/mo for ~1200sqft. You guys sure do get insanely cold out there for long periods of time, so be careful on the assumption there unless you can lock in a thermostat setting and tell them to use space heaters to supplement ($$$ to run, but its electrical so not your deal).

The nice thing with multifam is kinda what you alluded to. It's not a binary 1 or 0 (vacant or rented). For instance, one of my 4-fam units is undergoing rehab in each unit as tenants move out. With only 2 of the 4 units filled (the other two were being gutted), it still made enough money to break even on the entire operating costs. It takes some of the edge off when you have maintenance or large repairs to do. On the flip side, you have 2x or 4x as many people needing you per property.

@Ethan Blue briefly the 50% rule means you need to allocate 50% of your rental income to taxes, insurance, vacancy, repairs, management fees, etc. If you pay the utilities you need to figure 60%. then take the remaining rent and see if it will pay your monthly mortgage payment out of it. So if your monthly mortgage payment was $300 you would make about $225 per month from the rental. Most folks shoot for somewhere between $100 to $250 per door of the rental. If you want more detailed feedback you need to give more detailed information like purchase price, length of loan, rate of interest, repairs needed to rent, actual taxes and insurance costs, what the ARV is of the property, etc. Hope this helps.

@Dawn Anastasi Hi Dawn, thank you for your input. I totally agree with you. My biggest hurdle there is that those properties don't really exist in the area I live.

@Eric Y. Hi Eric. You are correct sir. I meant an average cost of $100/month for natural gas year round, so $1200/year. I'm thinking about installing a smart thermostat that I can control through the Internet. Thank you for your input, Eric it sounds like having a 4 family in that circumstance helped alot.

@Jerry W. Hi Jerry. I will try to give you as detailed information as I am able at this point.

The price is not solid yet, but the realtor seems to think 45k is a strong offer.

Loan length is 30 years with no prepayment penalty at 4.5%

No repairs are currently NEEDED to rent the unit, but I plan on personally painting and refinishing the hardwood floors. That work will cost me $1000

Taxes are $1222/annually

Once my repairs are finished the property would like be assessed at 65k or so. Real estate prices in northern Wisconsin are very depressed.

This deal is still very preliminary at this point, but all of your feedback is very appreciated.

My first property was just as you described. Heat controlled by the lower unit. I got complaints from the upper unit tenant that it was always either too cold or too hot. I tried to set the thermostat and encase it in a secured box. The lower unit tenant simply ripped it off.

And as far as the likelihood of both units being vacant at the same time is slim. Well you can throw that theory out. Ask me how I know. That was the final straw and I got rid of that place real quick. Granted it wasn't the best of places. But hey, I was new to investing. Lessons learned.

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@Ethan Blue no problem. I do have a few setup with the smart thermostats controlled via Wi-Fi, however if your tenants don't have internet (or decide to change the wifi info) they can just run manual programs and do what they want. I'd either offer them free range to pay the bill and do what they want, or they get a secured thermostat that you control remotely and you pay the bill. Just be prepared for one of them to always be whining.

@Ethan Blue No I'm not solely focusing on single family. I'm currently in the process of purchasing another 2-flat (upper and lower units) This is not a converted building. All utilities are separate. I don't believe I will ever purchase a converted home again unless utilities are separate. I just don't want the headache of shared utilities and I don't want to pay any as the owner.

Ethan, it might be worth it for you to look into putting a couple of dampers in your current ductwork, in essence making the upstairs a different zone than the downstairs. It shouldn't cost that much (the systems they showed on "This Old House" didn't look that complicated). Tenants would be happy to be able to control their own heat in each apartment. There's no reason they should have to be uncomfortable. Otherwise you're asking for frequent tenant turnover. Happy tenants will stay. Give them window plastic and make sure there are no big drafts. Very inexpensive ways to illustrate you care about their comfort, and to save money at the same time.

I really don't like the idea of you controlling their temperature remotely.

Updated almost 8 years ago

PS. I'm amazed that you can find anything for $45K in Madison. Yep, our taxes are high. I pay over $4K year per house...

@Ethan Blue Your taxes are insane there, they look like they are about 3% of purchase value per year. One thing you might consider is adding a second gas furnace. You could probably get a high efficiency for under a $1,000, the question would be your ability to change the ductwork. Gives you 2 separate utilities and lower heating bills.

@Arthur Banks Thank you for your input, Arthur. I share some of your concerns with shared utilities.

@Tanya F. Thanks that is some great feedback, Tanya. I agree with you, happy tenants stay and I would rather not get in the middle of their comfort. At my other duplex, it is so much easier to manage because everything is separate. That's the way I prefer it. I am going to do some additional research into your suggestion. Also, I am not really from Madison, WI. I just put Madison because I thought people would recognize that name. I'm from pretty far north.

@Jerry W. Our taxes are annoying. Ideally, I would want to separate everything, although I don't know if I could install another furnace without upgrading the electrical service to the home.

Having an up & down unit with the thermostat downstairs is going to be a nightmare to control unless the lower tenant likes it on the cooler side. Heat rises and the upstairs tenant could be blistering hot while downstairs is too cold. You get into the situation where the downstairs tenant is calling for heat and the upstairs on wants a/c. You may want to price a through the wall unit for the upper unit and see if that might resolve the issue somewhat....you'll still have to be careful with who you put downstairs. I would also put a cap on the dollar amount of heat included per month. We include utilities in everything we rent but put a monthly cap in the leases and the bills are sent to the properties every month so the tenants know where they are. Anything "free" or included is going to be abused....just like going to the local buffer...people tend to gorge themselves and it's no different with utils.

I had 2 post-menopausal women sharing a home...one was always hot...the other always cold....drove them and me nuts...not to mention the utilities. It was a massive house to cool....so I bought a spot cooler for $300 for the girl who was always hot and problem was solved. She could cool her bedroom and stayed happy. Happy Investing!

@Ethan Blue @Eric Yingling @Arthur Banks

Great information! You may have already found these in your research, but there are tamper-proof thermostat units that are hardwired to a range of approximately 68-72 degrees. Not even the manufacturer can change this range once the product has left the assembly line. I am looking into this product when I start investing. I am not affiliated with and have no financial ties to this company. I'm sure there are many other suppliers to purchase from. www.landlordstat.com/

Does anyone prefer certain thermostats over others? Have you found it to be helpful breifly counseling tenants in regard to heat before they move in?

@Carlton B. Hi Carlon, thanks for your input. You're right, I could certainly rent it as a single family, but where I live, the premium for single families is not as high. I used to live and teach in Milwaukee and your guys' rental prices soar far above ours for good neighborhoods. By renting as a single family home, I would cash flow $200 or so less a month. If I'm not able to figure out this whole utility thing though, that might be the best way to go.

@Drew MacDermott It's nice to have a product like that available. I guess to speak to @Tanya F. point, I don't want the tenant to think I am forcing them into anything. I want them to be able to control comfort levels and take responsibility for themselves, but if I have no other choices, it seems like this product could be very helpful.