Cheap Duplex for Cash or Decent Duplex w/Mortgage

3 Replies

Hi BP,

Need help deciding on my first intentional rental property purchase. I've found a cheap duplex for ~ $40k that this currently occupied and in pretty good condition, but in a C- neighborhood. I've also found a duplex for ~$140k that is in a B-/C+ neighborhood. I can buy the cheap duplex for cash, or put a 25% down payment on the decent duplex. Cash flow for the cheap duplex would be about $500/month, and about $250-300 on the other. Either property would be managed by a property management company.

I'm intrigued by the larger cash flow of the cheap duplex, and the idea of buying a few properties like these, holding them long term, and possibly getting a blanket equity loan to scale. The larger cash flow would enable me acquire more properties quicker. Disadvantages are low appreciation, harder to sell, and possibly troublesome tenant class. The other duplex will offer less cash flow, but more appreciation, and would be easier to sell in future years.

What are your thoughts? Anybody have experience with both types of properties?

I’m in a similar predicament, so I would love to see other responses.

Are you able to obtain mortgages on both properties?  It seems like the cash flow on the $40K is more than enough to cover a mortgage.  From what I can see, you have $35K of cash to spend based on ability to put 25% down on the $140K property

"Cheaper" property: $8K to put 20% down...$32K financed = ~ $150/mo mortgage payment.  With $500/mo in cash flow, you have $350 spread per month to pay for prop manager and assist with mortgage on "Decent" property:

"Decent" property: remaining $27K plus find $1K to put 20% down...$112K financed = $535/mo mortgage payment.  Say $250 cash flow from "Cheaper" + $250 CF from "Decent" = ~$500/mo to offset your mortgage payment.  

I know i'm leaving out other operating expenses but it seems if budgeted correctly, you might be able to make both deals work...also, not sure of your borrowing ability so these are back of the envelope calcs based on a 4% mortgage rate on both. Since 20% down, you avoid PMI.

If anything, since you get more cash flow out of the "Cheaper" property, I'd probably put down 20% and you get a much higher IRR on the $8K going in...use the remaining $27K to find your next deal.

@Mike B. Thanks for your reply!

I'd love to acquire both, but I don't see that as feasible as 1.) I'd have to put down 25% (not 20%, since this would be a mortgage on an investment property), as a down payment on the "decent" duplex, which would be just about all I have to invest, and 2.) I'm not sure, but I assume I'd be hard-pressed to find a lender willing to make a mortgage for $30k. Maybe that's the better play though, to scramble and find a lender for the cheaper property....

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