1st Home Owner Occupied Duplex--What next?

7 Replies

Hi everyone! I'd love to hear any advice from more experienced folks regarding my family's current real estate situation. My husband and I bought a duplex in 2017 for $205,000 in Milwaukee, and have about $164,000 left on the mortgage at a 4.25% interest rate. We live in the lower unit and rent the upper for $775, with a monthly mortgage payment of about $1300 (including escrow). We're thinking about buying a second house as our family is growing and we'd like more space, but are torn about keeping the duplex or not. It's been helpful to have the upper unit subsidize the mortgage, and we think we could rent the lower unit for $1200, which leave us with about $600-700 extra each month after paying the water utility.

The area we live in has been growing rapidly in the past 10-15 years as a hip neighborhood with rising property values. We'd like to buy another house in the area (either a single-family home or a larger, 3 bedroom duplex), but are not sure if the profit margin makes it worth keeping our current duplex or not. I think we could likely sell it for $220,000+ or more if we were to go that route, especially if we did a few little updates on the inside, but our initial thoughts are to keep the duplex as an investment and to have a bit of cash flow. The challenge would be to save again for another down payment for a house that will likely be pricier if it's bigger. Any thoughts or advice are greatly appreciated! 

I like cash flow, me and my wifes goal has been to purchased enough MFR's to cover our primary. We bought 2 properties and are next will be a single family. The cash flow from the rentals will cover our single families mortgage payment. This time next year we will be looking into purchasing our first property that we will not be occupying, it will be another MFR. I prefer cash flow so for me I would lean towards keeping MFR and finding another.

Thanks, Shawn! We tend to agree and I think will ultimately lean towards a plan like yours--cash flow matters a lot to us as well, especially with having a little one and managing the family income. That's great and really freeing that your two properties completely cover your primary residence. Thanks so much for your input!

@Paula Mason

I think keeping this property as an investment is a smart move. That being said, you should really look at the rates of return versus value of the property to make a smart decision. For example, I am in a similar situation with the duplex I live in but long term the cashflow in this property will be marginal at best. In comparison, I just bought 5 units that cashflow like CRAZY. That new property is just a better cash flowing investment. So long term, I am considering selling this duplex to reinvest in something with better cashflow. That being said, the renter I will get in this duplex will be low maintenance because it’s quite nice and will fetch high rents so there’s something to be said for that.

One more thought, have you considered taking a HELOC out on your current property to assist with the down payment on your next one? I just did this (used Sunmit credit union) and got a $26k line of credit which I am using for some big ticket repairs on my new property. You could also consider if either you are your husband can qualify for an FHA loan on your next property and get a low down payment. This can be done if neither or only one of you were on the mortgage for another FHA purchase.

Good luck!!

@Paula Mason I would be happy to list and sell the duplex for you - but that's not what I would recommend!

Seldom sell. Most investors regret properties they have sold early on in their career for a quick buck.

Cash flow is vital of course, but most people overlook that nobody ever got wealthy on cash flow. Wealth is created through the other three: equity (de-leverageing your loan), appreciation and taxes. Those require you to hold long term - not sell. Don't forget the cost of selling!

Properties that cash flow a bit more moderate, usually do much better in the long run with equity, appreciation and taxes.

My vote is to keep it, rent both units out and buy a bigger/better duplex with a conventional low down loan. Depending on your income situation you might be able to do 5% down - or 10% with PMI. If you really want to pull money out of your duplex, do it with a heloc as Brett Kash suggested.

Right now you have 50% of your portfolio rented - if you buy another duplex to move in, you will have 75% rented. At that point you should live for free, maybe even generate some free cash flow, which should go towards your next down payment. 

Some of my long term clients are on their third or fourth duplex. They always say this is the last one before they will buy a nice single family, but I have not seen it yet ;-)

@Paula Mason, I'm with Brett on this one. I would try to explore the FHA route if possible. If not, I'M look into a HELOC on the duplex for the down payment of another property. What price range are you looking at for your to be primary residence? 5% of 200,000 is only 10k, so a HELOC makes perfect sense, considering that you'll have cash flow.

Thanks so much, everyone, your advice gives us a lot of food for thought. I feel more confident in our decision to mostly likely keep the duplex and it ultimately reinforces why we bought it in the first place instead of a single family home--for more financial freedom, especially at a time in our lives when work-life balance matters a lot.

I'm going to continue to research the different ideas everyone mentioned, ie. FHA loan, a HELOC, etc., but I can see we have some options going forward, so that's good. And Marcus, I totally understand why some of your clients keep buying duplexes and pushing off the single family house until later! We've been really pleased with how relatively easy it's been to become both homeowners and landlords at the same time, especially when you have great tenants. I was a bit worried that if we rent both units, it's more of a moderate cash flow compared to what some of the larger duplexes out there may yield (it's a bungalow with two bedrooms on both levels), but I think that the location and home itself will hold its value and continue appreciating.

And Luis, we probably would look to spend between 200-250K  for our next property, but if it ends up being a bigger duplex that ultimately we could fully rent again (an appealing idea!), then I think we'd be at our goal of having all mortgage costs covered by the rental income and having a bit extra to save. And thinking of building of a portfolio rather than simply owning a single property at all times is a newer mentality for us, but I think one that would ultimately pay off more in the long run. 

And @Brett Kash, were you happy with your experience at Summit Credit Union? I'd like to consider a credit union in the future. 

I greatly appreciate everyone's feedback! Thanks so much again.