Beginner Owner-Occupancy Duplex Opportunity

5 Replies

BP,

I am currently looking to purchase a duplex (3bd/2.5ba) that I plan to live in and rent for the rest of my time here in college. With no real experience in REI (but wanting to begin as soon as possible) I thought I may run this deal on the forums and see I can get some feedback from more seasoned investors. I have ran some of the formulas such as the 1% rule and the 50% rule but I just don't know how well of an indication that is on cash flow in this situation. Some details on the property are as follows:

Listed Price: $179900

Purchase Price: $175900 (may start offer at 170900)

Down Payment: 3.5%

Loan: 30 yr fixed @ 3.75%

Monthly Payment including taxes and insurance is estimated at $1,212

It will need a new washer and dryer on one side

I have another 5 people who would rent from me and I have told them $900/unit (units around it rent for around $750/side however $300 a person would be cheaper than they are paying now). This would bring in $1500/month (excluding my rent).

Currently each side is renting for $775 and $750. I believe I would need to reduce rates to around these numbers when these tenants moved out to keep it rented.

My plan is to live in one side while I finish my last two years of school, then either continue to rent it out or cash out (hoping it has appreciated).

I would love to have some opinions on this from other investors.

Much appreciated,

James Simpson

@Colin Simpson   So I ran this thru my spreadsheet using your numbers and assuming your going to self manage, and you will not have landscape maintenance cost.

What about utilities? I figured none since you didn't mention them, but know that in most cities sewers and water can be lien-able if not paid.

What about garbage? I have none included again.

If you rent out both sides as $750/month then you profit $288/month. Assuming there isn't much differed maintenance and its in a good area most investors would say this is a buy since they like to see a minimum of $100/door 

We have to look at this duplex as if you where not living in it, even tho you will. Because eventually you won't and it needs to be cash flowing well at that point.

I use a formula called DSCR, and I normally like to see a bare minimum of 1.20 and prefer 1.30. This deal as stated by your numbers runs at a 1.08, without PM and with 2 tenants paying 750 each.

That being said, your getting in with very little money down, and its offsetting your cost of living now, plus your entering the REI game young giving you a good head start.

My main concern is that you have funds to absorb any disasters that happen early on, like AC/water heater/roof repairs. These can be thousands and hurt you if your not ready.

With all of that out there your idea is exactly what I am teaching my 19 yo nephew right now.

Please let me know how it goes.

@Chris Adams  

Thank you for responding, I greatly value the information and opinions I get on this site from investors such as yourself.

I do plan on taking care of all maintenance and landscaping. I have a background in general construction so I hope I can do most things on my own.

As far as all utilities including garbage, the tenants are responsible for that but perhaps I should check the city's policy regarding sewer and water being lien-able.

The duplex is nearly 20 years old but appears to have been well taken care of so other than the initial cost of the washer and dryer I don't foresee many maintenance expenses.

Also, I do have a bit saved up for any disasters I may come across, though I'd really enjoy not having to dig to deep into my pockets!

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Hi James,

Congrats on considering an RE investment while you're still in college - I wish I had been half as smart at your age!! 

While I like your strategy of buying a duplex and living in one side, this specific deal is too slim for my taste. It does not meet the 1% rule when you use comparable market rents and analyze it purely as an investment property (without you living in it). 

Based on my quick calculations I don't think it meets the 50% rule either. $18k in gross annual rent would leave you $9k for  debt service and profit, and I think the debt service on your loan will run about $9500 per year, which means you're cash flow negative every month. 

I think you should look for a better deal, or if you can come up with a larger down payment it might make sense since your mortgage payment will be lower = more cash flow. 

Best of luck and keep us posted on progress! 

Thanks for the input @Chris Kennedy !

I did not go through with the deal thanks to the input I received and quite a bit of "analysis paralysis."  I apologize it has taken me 2 years to reply to your post but I was just going through my old posts and saw that I had not replied.  Just reading through it gave me that "aha" moment on calculating expenses using the 50% rule of thumb that has been bogging me down. Thanks again!