AM I losing Money on This Duplex Or Is It OK?

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AM I losing Money on This Duplex Or Is It OK?

Barbara G.
Hartsdale, NY · Member since 2015 · 874 posts · 218 votes

How are we doing here?

We Bought 2 matching Duplexes in Feb of 2014 and paid  $332,000 (+ closing costs) for both of them.

They needed approx $37,000  ($18,500 each) worth of rehabbing and were occupied with tenants paying $1,000 each.  We raised the rents to $1,100 and one tenant moved and we were vacant for  2 months while we renovated that apartment.   We spent approx $20,000 so far on renovations and estimate we have approx $17,000 more to spend on renovations.

The bottom line is we don't think we will be finished paying and doing renovations until March of 2016 so we have put all our cash flow back into renovating these 2 duplexes.  When we are finished the 2 will have cost us approx $369,000 and we will have gone without any money for over 2 years

We have saved approx $10,000 in taxes (we believe), and paid down our principal on our morgage approx $8,000.  Zillow puts the estimate of the 2 duplexes at $500,000 which if correct is a lot of appreciation?

So how should we consider this purchase?   Is it a success? or a failure? or just OK?  

These 2 were our first real estate purchase so it was our entry into real estate and we are glad about that

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Mike D'ArrigoPro Member
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
11y

@Barbara G.This looks like a classic case of not defining your objectives before making an investment. Without having a clear financial objective, you can't possibly know if you're successful . It's like driving your car and not knowing where you're going. How do you know if you got there?

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  • Jassem A.
    Investor · PA · Member since 2013 · 1k+ posts · 602 votes
    11y

    2 duplexes (4 units) or 2 units?  It could be a good deal if you expect that kind of equity or future appreciation and it is a good and improving neighborhood.

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  • Kevin Harrison
    Investor · Woodbridge, VA · Member since 2015 · 476 posts · 197 votes
    11y

    I agree. If this is 2 duplexes then a pretty decent deal but not a killer. If this is just 2 units then you are not even close to the 1% rule and most likely losing money without a whole lot of appreciation.

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  • Barbara G.
    OP
    Hartsdale, NY · Member since 2015 · 874 posts · 218 votes
    11y

    Hi

    Thanks for the responses but first of all I made a big negative error

    Zillow estimated our duplexes at $440,000 and not $500,000. Although they compared it unfavoribly to a duplex next to us that I consider not as nice as ours.  Its also much much older than ours.  Who knows??

    There are 4 apartments with an income of $4,400 for the 4  Two apartments in each duplex.  That's more than the 1%

    We also self manage and do most of the repair work  and the handi man work and the plumbing work and the kitchen installations our selves.

    1Reply
  • Jassem A.
    Investor · PA · Member since 2013 · 1k+ posts · 602 votes
    11y

    Sounds like a decent deal if you are getting quality tenants and if mortgage is low enough

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y

    Failure.  You are saying you lost money all this time...and a lot by my count...and you are wondering if it's OK?

    Let's approach this from another angle.  How many times could you do this, at the same time, and not go broke?

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    11y

    Were these your expectations going in to it @Barbara G.?  A long, long renovation project?  Things that go according to plan and as expected are what we hope for!

    As buy and hold LLs, we tend to lose money on any reno in the beginning. But when we get it back, it pays us every year for long periods of time.   If I'm going to go through this difficult process to value-add, I have to buy significantly below market value.  (Zillow estimates are hit and miss.  I wouldn't consider it to be spot on necessarily, IMO.)

    In my area that means way above the 1% rule.  Here I pay 1% for essentially turnkey, not property that needs to be renovated.  Your market may be much different.  Do you feel you bought well below market or just kind of average?  The same price any mom and pop would pay for a little income property?  

    I focus on sellers with a problem, deadlines, things like that.  If the property needs reno, I have been through them so I will make sure to be compensated a lot more than dollar for dollar via a discount.  Either way it sounds like a great experience to learn from.  Congrats on your first units!

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  • Barbara G.
    OP
    Hartsdale, NY · Member since 2015 · 874 posts · 218 votes
    11y
    Originally posted by @Jassem A.:

    Sounds like a decent deal if you are getting quality tenants and if mortgage is low enough

    Well we put 25% down.  We flow about $2,000 + but don't figure PM, and figure all our renovation/repairs costs as original cost. 

    I don't know what you call "quality" Tenants.  Ours are all immigrants and working class people.  We have the same tenants for this entire 1 1/2 years.   They all seem like nice family  people.   A few have a lot of trouble speaking English.   They don't have any problems with each other.  They don't complain.  We take care of any problems they have.  If one of their appliances like the stove or refrigerator stops working we have a new one in there the following day, because everything in there was from 1985 so everything that has not been replaced is 25 years old.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y

    One of the most important rules of REI is much like poker....stay in the game. How long could you stay in the game if you repeated this again? If you can't do it more than once, you shouldn't do it even once.

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  • Barbara G.
    OP
    Hartsdale, NY · Member since 2015 · 874 posts · 218 votes
    11y
    Originally posted by @Steve Vaughan:

    Were these your expectations going in to it @Barbara G.?  A long, long renovation project?  Things that go according to plan and as expected are what we hope for!

    --------------------------------------------------------------------------------

    I don't know what we expected any more.  i know we did not expect to lose one tenant immediatley.  I thought 2 months was too long to be vacant.  We did not have any of our money at that time to put into this so we had to wait for the rent to renovate.   

     We did buy another 2 Duplexes this year that was pretty much Turn Key.  These new 2 were only 12 years old and really perfect so although they cost $68,000 more for the 2 they brought in the same rent and were no work and flowed from day one but also had only approx 1%

    ------------------------------------------------------------------------------

    As buy and hold LLs, we tend to lose money on any reno in the beginning. But when we get it back, it pays us every year for long periods of time.   If I'm going to go through this difficult process to value-add, I have to buy significantly below market value.  (Zillow estimates are hit and miss.  I wouldn't consider it to be spot on necessarily, IMO.)

    -----------------------------------------------------------------------------

    I think in our area of CT,  we have to take what we can get or we get nothing

    -------------------------------------------------------------------------------

    In my area that means way above the 1% rule.  Here I pay 1% for essentially turnkey, not property that needs to be renovated.  Your market may be much different.  Do you feel you bought well below market or just kind of average?  The same price any mom and pop would pay for a little income property?  

    ------------------------------------------------------------------------------

    Mom and Pop would not buy this because it was a mess.  Both roofs had to be replaced.  The fence was falling down.  Fronts had to be replaced and on and on.

    ----------------------------------------------------------------------------------I focus on sellers with a problem, deadlines, things like that.  If the property needs reno, I have been through them so I will make sure to be compensated a lot more than dollar for dollar via a discount.  Either way it sounds like a great experience to learn from.  Congrats on your first units!

    ----------------------------------------------------------------------------------We should be so lucky as to find sellers with problems,   If we did not buy this we would have bought nothing.  Its been a lot of hard work.  This is a difficult market.  Most of this area is old stock and that we wanted to completly avoid.  We can;t even find another house in this area that we want to buy or can buy.

    I think next year we will be happier with this property

    1Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    11y

    @Barbara G. thanks for your responses.  Sometimes the best action is no action.  I don't force something to work, but I understand being antzy to get started.

    Because most of us LLs buy for the long-term, you will probably be just fine 5 years down the line.  Early on I under estimated a reno and it's not a mistake I'm likely to make again.  Ever!

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  • Barbara G.
    OP
    Hartsdale, NY · Member since 2015 · 874 posts · 218 votes
    11y
    Originally posted by @Joe Villeneuve:

    One of the most important rules of REI is much like poker....stay in the game. How long could you stay in the game if you repeated this again? If you can't do it more than once, you shouldn't do it even once.

     Well Joe

    Yes I think we would do this one again But we would do it as a BRRRR

    It was our first buy and I think that makes it more acceptable.  If we did it as a BRRRR we would not be complaining so much and we would be finished with it.  Right now it is inch by inch.  We still have to do one more roof immediatly because it has started to leak and if the insurance company sees it they will cancel our insurance.  

    We want to stay in the game.  This has appreciated and it has helped with our taxes and we have paid down the principal, although you don't seem to think much about that benefit

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y
    Originally posted by @Barbara G.:
    Originally posted by @Joe Villeneuve:

    One of the most important rules of REI is much like poker....stay in the game. How long could you stay in the game if you repeated this again? If you can't do it more than once, you shouldn't do it even once.

     Well Joe

    Yes I think we would do this one again But we would do it as a BRRRR

    It was our first buy and I think that makes it more acceptable.  If we did it as a BRRRR we would not be complaining so much and we would be finished with it.  Right now it is inch by inch.  We still have to do one more roof immediatly because it has started to leak and if the insurance company sees it they will cancel our insurance.  

    We want to stay in the game.  This has appreciated and it has helped with our taxes and we have paid down the principal, although you don't seem to think much about that benefit

     So you still have more money going out, and new money soon to be going out on top of it (roof repair), than coming in?...and  this is on top of the already accumulating losses?

    If this was a poker hand, and I'm not good at poker, I would fold. In the REI world, that means cut your losses, take your assumed appreciation now (before the mounting losses take that away), and move into an investment that makes money from the start.

    You're right, I don't think much of rationalizing how tax deductions (if it was a tax credit I would have greater appreciation for it), and a paid down principal (added equity that you can't use until you sell...so it's basically a trophy).  What I see is more of your money going out, the money coming in as far less...and the negative spread between the two growing.`

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  • Barbara G.
    OP
    Hartsdale, NY · Member since 2015 · 874 posts · 218 votes
    11y
    Originally posted by @Joe Villeneuve:
    Originally posted by @Barbara G.:
    Originally posted by @Joe Villeneuve:

    One of the most important rules of REI is much like poker....stay in the game. How long could you stay in the game if you repeated this again? If you can't do it more than once, you shouldn't do it even once.

     So you still have more money going out, and new money soon to be going out on top of it (roof repair), than coming in?...and  this is on top of the already accumulating losses?

    --------------------------------------------------------------------------------

    Well Joe

    Maybe I am just dumb.

    I am ot usig my money to removate I am using the cash flow to renovate;

    Instead of using the cash flow of $2,000 I am putting the $2.000 back in renovating the property.  By Feb of 2016 I will be finished renovating and the $2,000 a month will be mne

    Tell me is that losing money???

    To me it is not.  

    It is making my property more salable and more valuable.  

    Is putting money into a flip losing money???

    Isn't this the same thing??? 

    Bg

    ----------------------------------

    You're right, I don't think much of rationalizing how tax deductions (if it was a tax credit I would have greater appreciation for it),

    ---------------------------------------------------

    But if I am paying $5,000 less in my taxes because of this loss aren't I ahead by $5,000??

    and a paid down principal (added equity that you can't use until you sell...so it's basically a trophy).  What I see is more of your money going out, the money coming in as far less...and the negative spread between the two growing.`

    ============================

    It isn't my money going out it's the cash flow on the property going out!!!

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  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    11y

    @Barbara G.This looks like a classic case of not defining your objectives before making an investment. Without having a clear financial objective, you can't possibly know if you're successful . It's like driving your car and not knowing where you're going. How do you know if you got there?

    4Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y
    Originally posted by @Mike D'Arrigo:

    @Barbara G.This looks like a classic case of not defining your objectives before making an investment. Without having a clear financial objective, you can't possibly know if you're successful . It's like driving your car and not knowing where you're going. How do you know if you got there?

     How many times can I vote for this?

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y

    @Barbara G.Isn't the cash flow your money?

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  • Barbara G.
    OP
    Hartsdale, NY · Member since 2015 · 874 posts · 218 votes
    11y

    Why isn't this just like a slow flip

    People borrow hard money to renovate to flip.  Here the money is coming out of the property instead of a hard money person.  The property is worth more because it has been renovated.  Beginning in Feb 2016 it will flow because all the renovations have been completed.

    I have paid $10,000 less to the IRS because of this property.

    I have paid $8,000 toward the principal.  

    The property has appreciated from $333,000 to $440,000.

    How is that losing money???

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  • Michael Franklin
    Real Estate Investor · Bismarck, MO · Member since 2014 · 45 posts · 8 votes
    11y

    @Barbara G.

    In my opinion it is very different than a traditional(albeit, long) flip.

    As a few people have alluded to, flips have(or should have) a timeline, budget, and multiple exit strategies established BEFORE the project starts. And, the ARV SHOULD NOT obtained from a Zillow "Zestimate." These are often very inaccurate, especially when considering multi-family properties, and should not take the place of generating "real" comps and thoroughly understanding the details of other properties in the area.

    Most flips end with a liquidation of some kind, such as cash out refinance or selling for profit. I gather from your comments that you intend to hold this property, so that "appreciation"(used loosely) won't be realized in a sale price and a 70% refinance (assuming your ARV is close to accurate) won't even get your whole down payment back out of the deal, let alone repair costs.

    Final thought: If you have to include tax savings and loan pay-down, and exclude PM expenses and reserves to make the numbers look better, it's too thin. 

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  • Barbara G.
    OP
    Hartsdale, NY · Member since 2015 · 874 posts · 218 votes
    11y
    Originally posted by @Michael Franklin:

    @Barbara G.

    Final thought: If you have to include tax savings and loan pay-down, and exclude PM expenses and reserves to make the numbers look better, it's too thin. 

     -------------------------------------------------------------------------------------

    How thin is this ???

    If the rent from these 2 duplexes is $4,400 a month (and going up)  and the expenses are $2,200 (with a $200 a month reserve for Maintanence and no PM)  How am I losing money??   The 2 duplexes cost $332,000.

    I am renovating out of my positive cash flow.  In Feb of 2016 (5 more months) I will no longer be spending any more on renovation.   My renovations will be complete with all new Kitchens and new  Baths and 2  new roofs +.   I will be cash flowing $2,200 a month + Tax Saving and + pay down of Principal (now $4,000 a year).  In addition I will have a property with all new appliances, new roofs, new fronts and will have improved my property over $50,000.  

    How am I losing money here?     Maybe $22,000  profit a year  (_+ tax savings and pay down of principal )  is too thin for you but  its not too thin for me.   

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  • Michael Franklin
    Real Estate Investor · Bismarck, MO · Member since 2014 · 45 posts · 8 votes
    11y

    What vacancy rate are you accounting for?

    What is your monthly PITI?

    I understand you have renovated and replaced many appliances, so your realized M&R and Capex should be lower for the next 5-10 years, but there will be turnover and other recurring costs. $200/mo is only 4.5% of the gross rents.

    You don't include property management costs? You plan to manage the property indefinitely then? And there is a finite limit to the number of units you can manage yourself so you will hinder your future growth. Plus, is your time not worth anything to you? At some point, freedom becomes more important than maximizing income, but if you don't account for PM at the beginning, you're stuck.

    Listen/read some of Brandon Turner's comments on that through the blog or podcast. He didn't account for PM starting out and he says those properties are the ones he loses money on because they weren't good deals to start with. They were too thin when you look at ALL associated expenses over the long term.

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  • Vincent Crane
    Realtor · Atlanta, GA · Member since 2015 · 693 posts · 357 votes
    11y

    Your value of your house doesn't come from zillow... it comes from comps, or as an investment property, it's valued at a cap rate, meaning how much money it makes. Zillow is not what you should be using to assess the value of your property.

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    11y

    @Barbara G., you said "If the rent from these 2 duplexes is $4,400 a month (and going up) and the expenses are $2,200 (with a $200 a month reserve for Maintanence and no PM) How am I losing money?? The 2 duplexes cost $332,000".

    But, aren't your expenses (while renovating) $4,400 per month? ie. NO cash flow? And, NO monthly return on your initial outlay of $83k cash? (Well you DID ask: Am I losing money?)...

    Tax write-off blah blah is a lot of gobbledygoop that should not really be your reason for investing - especially when other properties might be able to be bought that result in such good returns that you shouldn't mind paying EXTRA Taxes!

    You had better HOPE that there is appreciation happening (but never tabulated from the "Zestimate"!) and that the cash DOES start to flow next year - but there looks to be a big back-log to catch up on. Cheers...

    1Reply
  • Account Closed
    Professional · Jacksonville, FL · Member since 2015 · 397 posts · 34 votes
    11y
    Originally posted by @Barbara G.:

    How are we doing here?

    ..  Zillow puts the estimate of the 2 duplexes at $500,000 which if correct is a lot of appreciation?...

    You may want to have someone with access to the MLS pull comps and get you an actual somwhat reliable value estimate than make critical investment decisions based on what zillow says.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y
    Originally posted by @Brent Coombs:

    @Barbara G., you said "If the rent from these 2 duplexes is $4,400 a month (and going up) and the expenses are $2,200 (with a $200 a month reserve for Maintanence and no PM) How am I losing money?? The 2 duplexes cost $332,000".

    But, aren't your expenses (while renovating) $4,400 per month? ie. NO cash flow? And, NO monthly return on your initial outlay of $83k cash? (Well you DID ask: Am I losing money?)...

    Tax write-off blah blah is a lot of gobbledygoop that should not really be your reason for investing - especially when other properties might be able to be bought that result in such good returns that you shouldn't mind paying EXTRA Taxes!

    You had better HOPE that there is appreciation happening (but never tabulated from the "Zestimate"!) and that the cash DOES start to flow next year - but there looks to be a big back-log to catch up on. Cheers...

     ...and Hope is not a sound business plan

    1Reply
  • Barbara G.
    OP
    Hartsdale, NY · Member since 2015 · 874 posts · 218 votes
    11y

    Joe how does your wife deal with you when you are always right!!

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