First time home buyer for duplex

6 Replies

OK so I have been doing a lot of research utilizing BP, real estate agents, and mortgage lenders. With a mortgage being $1,000 or more, how does anyone generate cash flow with that? I've done numbers on a few properties and according to the 50% rule, I would not be generating any cash flow really. Obviously for my first property I would occupy one unit and rent the other unit out of a duplex. Hypothetical scenario:


Duplex at $850 per unit = $1,700 for income

According to 50% rule this property would not generate much cash flow. So my question is, how and why is my mortgage so high? Is there anyway to get a lower mortgage? should I shoot for higher income rental markets? I know the 50% rule is just a rule of thumb but I am still having trouble making sense of the numbers.  

@Rocco Grossi , if you are going to occupy a unit in a duplex (or triplex), you probably shouldn't expect to make any significant cash-flow.  But, you will seriously minimize if not eliminate your own housing expense, so you'd be staying there for much cheaper than it would cost to rent an apartment.  

The only ways to get a lower mortgage payment is to get a lower interest rate, put more down, or find a cheaper property.

@Rocco Grossi Welcome to BP. I'm also a new investor and have found the information available here to be extremely valuable. Have you checked out the Ultimate Beginner's Guide ( I'd also recommend you check out the podcasts. 

Based on your question, it seems like you are looking at properties between $200k and $250k (depending on interest rate and term of loan). A duplex in this range (at least in my market) would be tough to cash flow as people won't likely be paying nearly as much as you'd need to clear the 50% rule. 

The most obvious and easiest way to decrease your mortgage payment would be to 1) Decrease the purchase price of your home, 2) Put up more of a down payment (i.e. put 20% down instead of 5% down on a conventional loan. 

Purchasing in a higher rental market doesn't necessarily mean that you'll be able to cash flow, since cash flow is going to be a function of the purchase price of the house and the amount of cash (rents + additional income) that you'll be able to bring in. 

@Rocco Grossi , looking at your numbers a bit more, the hypothetical property you mention probably would not make a very good rental even if you are renting both units.  As discussed on BP, a good quick pass estimation of a good deal is monthly rent 2% (many people say 1%) of the purchase price.  If my quick estimate is correct, that mortgage payment (assuming 30 year loan-- another thing that affects mortgage amount that I left out in my last post) would be +/- $200K property.  At $1700/month rent, you are less than 1%.  

Very good point guys. Ok so how about this scenario, similar to the one above.

Purchase price 165,000

2 one bedroom units, 1 unit already has a tenant at $700 a month.

estimated mortgage- $1,167 a month

Property is in a pretty good area where I should be able to rent both units out $850-$900. But again, I will be living in one of the units. If I keep tenant in at $700 (she's been there for 2 years already) that leaves $467 a month that needs to be covered for mortgage by me. $467 a month plus utilities, I pretty much would be paying what I currently pay now at an apartment. Is this a bad deal? 

@Rocco Grossi , what down payment and interest rate are you using to determine your mortgage payment?  

Also, if you know the going rent should be at least $850, then you should be increasing the rent as soon as you can on the tenant in place.  Probably not all the way right away though.

Either way, if you find yourself in a position where owner occupying a duplex is similar expense to renting, you have to remember that you get tax benefits of home ownership, the mortgage will be paid off over time, and potential appreciation so the balance tips to owning being better.  

Well the owner of the property is a mortgage broker. He worked numbers for me and told me what my mortgage would be. %3 down on the loan, majority of that and closing costs would be covered by first time home buyers grants. He says I'd need 3,000 to get in and that's all I'd need. Again, we went over this real quick on the phone so he kind of threw these numbers out. You're right I would be owning something vs. renting, which is a benefit in itself. @Brett Russell    

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here