Duplex, cash or finance, or stock market?

Question

I've got a generous older family member that wants to step away from a 100% owned 30 yr old duplex & deed it over to myself & my 2 siblings. I'm trying to determine whether to sell it & invest my third in an index fund or buying my siblings out & becoming a landlord .

I running a 10 year model here.

Approx value is $200K

Annual rent from both sides combined, brings in $15,200 net, annually after all expenses ( Ins/Property Tax/Maint/95% occupancy rate)

Ok - here are the factors if I buy my siblings out:

- Do I use cash? If so I lose 9% earning power of that same $ in an index fund.

- If I get a loan ( which will be tricky since there is no mortgage, or at least a loan where I can deduct interest), the cost of $ is kinda steep on a $135K note

- Duplex is fully depreciated so recapture tax will be steep when I eventually sell it.( I would inherit the same tax position of my generous family member ) Also means I wouldn't be able to take any depreciation.

- Duplex will need $35K (approx & is a cash layout) for rehab.

When I run the numbers over 10 years it seems i would be barely ahead to keep the duplex vs. investing my cash outlay over 10 years at 9% in an index fund. This seems weird since I am getting 33% of the property for free.

My concern is my spreadsheet is missing factors. Is there a standard/favorite app/spreadsheet/site that compares investing your cash into rental property vs. stock market at an assumed rate of return?

Many thanks,

MB

Cody Dunifon · Answer

Mitch,

I am just throwing the idea out there because it would be another option buying the property. You could purchase the property through a old IRA/401k account and self direct the property. Obviously their are some variables that come into play but if you have some questions feel free to direct message me as I could answer any questions if you chose to go that route. If not good luck with the deal Mitch!

Cody

Mitch B. · Answer

-- As I think I stated in the post, expenses include:

( Ins + Property Tax +Maint & 95% occupancy rate)

-- $2425 is gross monthly rent

-- The $35K is my estimate to redo bathrooms, kitchen , paint & retape split corners & paint outside as it is still in it's original decor from 1968 when it was built. This is for the larger of the 2 units.

-- Property values have fluctuated +/- $10K over the last 10 years. Established neighborhood, good school system. Don't predict any appreciation.

-- I don't believe my buying out the siblings raises the cost basis since, as I understand, the house stays in the same taxation position as the person who is "gifting" the duplex. But I hope I am wrong. The $35K would indeed increase the cost basis.

-- I believe the rent demand is healthy, however, my guess is the current owner has kept the property occupied by keeping rent well below market. My guess is I will be able to add $150 to the rent on the renovated side.

That paint a better picture?

Thanks,

Jerry W. · Answer

@Mitch Berke there is more information you need to add. First what is the actual rent per month gross that comes in. When you say net we have no idea what expenses you are taking into account. Next you say it needs $35K in upgrades but right now it appears to be cash flowing(but we need those figures). However you say it nets over $1400 per month. Will you increase rents by putting that money into it? What needs upgrades? New roof? New kitchen cabinets? Keep in mind if you buy your 2 siblings out that purchase will add to your basis and be depreciated out for a tax offset.

Has the property been going up or down in value lately? How strong is the rent demand? lots of information we do not have.

Duplex, cash or finance, or stock market?

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