Just bought a duplex, next move?

Question

I just put 20% down and closed on a duplex last week.  The plan was to rebuild my savings and buy a single family home in 3 to 5 years, and have our main unit in the duplex cover the mortgage of the future SFH. Than buy a triple or quad after.

Which would make it a 5-7 year plan.

This is slower than I’d like.  Since I already have 20% down, should I thunk about take a home equity loan and keep my out for the triple to quad now?

Also, I just have the one unit.  Should I make a separate account or just deposit the monthly rent to my bank account but separate the finances in the book keeping portion?

Filipe Pereira · Answer

Congrats on your purchase @Wilson Rith!

Personally, I'm a big fan of minimal debt and try to always put at least 20% down on my properties and leave it there. It just helps me sleep better at night. It never hurts to keep your finger / eyes on the market, and having some funds ready to go. You may want to consider a line of credit rather than a home equity loan. I believe in that case you only get charged if you use it.

If you're good at accounting, one account is probably fine, but most people will recommend separate accounts. And you're right - the MA (and CT) markets are incredibly hot right now. I just watched a duplex in West Hartford get 36 (THIRTY SIX) offers! Yikes!

@Jas Diorio you don't need to have the LLC formed before making separate accounts, you should be able to change the name of the account holder later on (although this does just seem like extra work).

Wilson Rith · Answer

@Cameron Tope Thanks for the reply.

The reason I put 20% down is that I wanted to be in control of my own destiny per se.  The last time I tried to buy a property about 2 years ago the financing fell through bc the fha guidelines were too strict.  And I didn’t want to pay PMI.

Also my housing market is super competitive.  There’s very little inventory in Massachusetts and a lot of buyers.  I had to beat out 14 other bids, and decided a conventional loan was the way to go.

Will look into opening another account!  Thanks.

Lien Vuong · Answer

Congrats on your first purchase!!

A HELOC option is good especially as rates are very desirable at the moment since you can pull out up to 95% LTV on your primary residence. I would start with the lender you have now since they are currently servicing the loan and look at what they can offer you. I would factor that HELOC 'cost' into the multi purchase when you do identify it but multi rates even without owner occupied right now are around 3.25-3.5% so it's very attractive for a buy and hold strategy.

I would start with a clean process and start depositing the income of the tenanted unit into a sep account and dedicate it to that property as you wont be living there in the future. That way you can keep accounting tidy and you'll know the true income/expenses of the property for property deductions for your CPA.

Jas Diorio · Answer

@Lien Vuong, curious, does it matter if an LLC has been formed before separating bank accounts?

Eric Johnson · Answer

Wilson, you can get up to 95% LTV on conventional financing, which includes 90, and 85% LTV as well. I would inquire about those options. What are your purchase prices? Consider lowering those. You're in this to make money, not to buy in the best neighborhoods (exceptions to this rule apply).

Derreck Wells · Answer

I just wanted to drop you a note on the new lead paint laws in MA. They now only give you 90 days to delead when you buy a rental. If you don't delead within 90 days of closing, you can be held liable for any lead poisonings that have ever happened at the building, even if it was before you owned it. They basically hold the building liable rather than the owner and that liability transfers from owner to owner until someone deleads it and breaks the chain. If you delead, and maintain the standard, you will be in the clear.

Here's the law (emphasis added by me):
460.100: Duty of Owner(s) of Residential Premises 
(B) Whenever any residential premises containing dangerous levels of lead in paint, plaster or other accessible structural material undergoes a change of ownership and as a result a child younger than six years old will become or will continue to be a resident therein, the new owner shall have 90 days after becoming the owner to obtain a Letter of Full Compliance or a Letter of Interim Control, except that if a child younger than six years old who is lead poisoned resides therein, the owner shall not be eligible for interim control, unless the Director grants a waiver pursuant to 105 CMR 460.100(A)(3). 

Note it says "a child younger than six years old will become ... a resident therein...". It is assumed by the state that any rental larger than a 1 bedroom will fall into this category at some point because of the anti-discrimination laws that prevent landlords from refusing a family because they have a child. The law specifically excludes rentals under 250 square feet. Basically this is their way of getting all rentals lead safe. If you don't delead, you will be putting yourself in a dangerous position.

This isn't a bad thing if you knew before you closed on your duplex. But you can still use this knowledge in your future negotiations. Assume $5k per unit and count the exterior as a unit. So a 3 family is 4 units = $20k for your negotiations. They rarely cost that much, they're usually half that, but if the property needs windows and exterior doors, it can get expensive. Like I said though, most come in about half that, so use $5k to negotiate and even if you get a 50% concession you could still potentially get it all paid for my the seller.

I can run any addresses through the database for you and see if they've been inspected or deleaded for you. Sometimes they get inspected but not deleaded and this creates a whole other set of problems. If that's the case, you can't do any renovations until you have it professionally deleaded or it would be flagged for Unauthorized Deleading and you can get fined and the property would never be able to get a Lead Certificate, only a letter of Environmental Protection that states you did illegal work, got caught, then had to pay a professional to clean up the mess. You don't want that.

If you don't already have an lead inspector you like to use, I recommend Anderson Lead Inspections, www.andersonlead.com. No, I don't get a referral fee or anything, I just know he's fair and works to help owners.

Let me know if you need any help.

Good luck on your investing!

Derreck

Wilson Rith · Answer

@Lien Vuong This is the most complete answer by far. Thank you so much!

Cameron Tope · Answer

Hey Wilson,

Why did you put 20% down on the duplex? If you're living in it then you could have put 5-10% down as an owner-occupant and used the other 10-15% on your next purchase.

If you're not living in the duplex, then find a property you can house hack and put as little down as possible. That way you'll have some more cash for the next deal.

That's really the only way to grow quickly.

I personally liked having another bank account and credit card for my rentals. It made the accounting a lot easier. You don't even need a new bank, just a new account and a credit card you use for purchases related to the rental.

Tanner Morrill · Answer

Getting a home equity loan (HELOC) may be difficult if you have less than 30-40 percent equity, especially if the duplex is titled in an LLC. For financing purposes you may want to keep it in your personal name before transferring title, just get asset protectionsnin place best you can (insurance, LLC minutes, etc). Use a separate bank account and budget for your duplex, especially if it's owned by a business. Don't drive yourself or your CPA nuts come tax time.

Just bought a duplex, next move?

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