Keep duplex forever or sell?

Question

Hi--I'm new here and am looking for some real estate investor advice.  My wife and I bought a duplex 7 years ago at the top of the market for $365000.  We planned on moving out in a year or so, but then the market dropped out and here we still are. For the last few years, we have figured that it might be best to save a down payment for our own single family house, and then just keep the duplex for some retirement income (we are 35 now). We rent the top floor for $1400 and we could probably get more next time around, as well as for the floor we currently live in. The trouble is that it has been difficult to save the down payment, and now I am wondering if it would be better just to try and sell the place if we could come out with enough for a down payment and move on with our lives.

But my question for you all is this place a good investment? We are on an ARM and a 2nd mortgage, and the plan was to refinance to a fixed mortgage this year. If we were to move out and still own, the rent would cover all expenses and maintenance to the point of breaking even, but it would be very tight. My thought was that it would be great just to hang on to it until it is payed off, but maybe these numbers don't add up to make this a very good plan? Any thoughts or advice on what determines whether one should keep and invest in a place vs. dump it and move? I'd very much appreciate the input!

Account Closed · Answer

Nate,

Why are you considering getting a 15 year loan when you're having a hard time saving for a down payment on a new place?  Go with a 30-year fixed.  You can pay down additional principal when your finance is approved.

I would refinance & keep the duplex.  You should have about $24k in savings in 2 years from the positive cashflow of the duplex if everything works out.  I know that would be a perfect scenario is I'll keep my fingers crossed for you.  I think it's a mistake selling the duplex now.  You would only be walking away with about $40k net in your pocket after the sale. I'll refinance and deal with the hassle.  $1k/month net goes a long way.

Whatever decision you make, I hope it's the right one.

Good luck.

Kama Ward · Answer

Sell it. Feel the freedom!! Take the lessons you've learned and, if you want to invest in the future, you will do it better without mixed feelings and more money in your pocket.  Stay on BP for at least six months, read lots of old posts. You will be smacking your forehead about what the old you did-- and be much more confident moving forward.

Nate K. · Answer

Thanks. To be clear, we live on the main level, and are renting out the 2nd level. The basement (though spacious) is half-finished, and would not be habited upon moving out. (we originally bought the building thinking it was a triplex, but shortly after buying we were told by city inspectors that we could never rent the basement out due to zoning. it had previously been rented out illegally).

Al, I had considered renting elsewhere, but with the tax breaks for being an owner occupant, we couldn't really find a place at a better deal than where we are currently at without seriously downgrading  our living space.

Greg, That is a good point about depreciation expiring at 27.5 years.

As for numbers, if we were able to refinance both mortgages, that would put me at about 1350 for the mortgage, 433 for prop tax, 166 for insurance(not sure after moving out?), 410 for utilities. That brings me to 2359. Through in another 200 for maintenance and finding a neighbor kid to mow/shovel, and I am up to 2559. At current rent rates 1400 x 2 (which i might be low on considering i am including utilities), I am only netting a couple hundred bucks. But with depreciation, I save another 233 in my tax bill monthly. Plus another 480 + in reducing my principal balance monthly. A vacancy would hurt though. Are these numbers tight for a good investment?

It's an old tudor house (1931). Most of the updates have been done now and it is in pretty good shape, but I have become weary about the amount of time I have spent fixing/improving. A big part of me wants to walk away, so I don't spend more and more weekends working on a place instead of spending time with the kids, etc.. but i imagine I work more on it simply because we "live there" and probably wouldn't be inclined to constantly improve everything if I was off-site :)

Rich Weese · Answer

This is what we call between a rock and a hard spot. You have a tiger by the tail because of price and terms you paid, I agree with those that have said to put on the brakes. Try and solve the one you have before adding more. Rich

Greg Turnquist · Answer

One thing: when you consider holding a property forever, don't forget that depreciation only lasts 27.5 years. After that, your property won't shield any more rental income. How old are you now, and how far away is retirement?

Al Williamson · Answer

Nate K. have you considered renting a place for your family to live and renting out your basement apartment to someone else? No need to own the home your family live in.

Jon Holdman · Answer

We lived in a basement apartment just after we got married.  Never again.

Replacing fridges and making repairs is just part of the business (I love it when Hyman Roth tells Michael "This is the business we have chosen" in Godfather II.)

"Enough" depends on your situation and goals.  If your goal is to save towards the future and you can support the negative cash flow, having a paid off property when you're 50 is certainly worthwhile.  If your goal and situation requires you have the income now, then not so much.  Also consider your situation is you're trying to save money for another down payment and trying to get a loan on another property.  This one may keep you from doing that.  Also consider if you can manage and maintain it yourself.  If you might move away, a simple repair you could do yourself for two hours of your time and $15 in parts may turn into $100 for someone else to do.

You can't trust zillow's zestimates. Look at their comps.  But not the zestimate.  You might want to have three agents come look at the property and see what they think it would sell for.  Tell them you want a contract within 90 days, not a "reach for the stars" high price that will never fly.  That way you will at least have some idea of where you stand.

Nate K. · Answer

I'm not sure exactly what the duplex would sell for. It has been tough finding comparables in the past. Zillow has it slotted for 345k, for what is worth.

Yes, that is a good point about the kitchens. They look nice now, but I fear replacing one of the fridges, or granite countertops.

Our family is outgrowing the 2BR duplex, with two kids. We'd love to get into our own space without foot-stomping  above our ceiling.  Just trying to figure if if I would seriously regret not hanging onto the place in 20 years if we choose to sell. But moving on without having to worry about upkeep, landscaping, etc is very tempting. We've had great tenants so far.

If we refi, do you recommend going with a 15 year or start over with a 30 year mortgage to keep the payment low? I would have to subsidize the 15 year payment, but a paid-for duplex at the age of 50 would be appealing.

What principle do you generally follow to determine if a place cash flows "enough" and is worth keeping? If it breaks even, but the tenants are paying off the mortgage, isn't that enough, or do certain investment principles suggest otherwise?

Dave M. · Answer

Did you mention how much you might net from a sale? That should factor into your decision...

Jon Holdman · Answer

Hmm.  Upscale kitchens and rentals.  Not a good mix.  If you decide to sell if at some point in the future, all that fixing up will need to be re-done.  Tenants are tough on a property.

$290K (including costs) at 4% for 30 years is P&I of $1384.  $3000 in rent makes it slightly better than break even with a PM, nicely cash flow positive it you manage it yourself.  Though, really, you're earning a lot of that cash by doing the PM job.