Purchasing a duplex at retail. Good idea? Bad idea?

22 Replies

Our tentative plan is to buy a duplex in our Denver metro area market, rent out the smaller half while updating the the side we live on then vice-versa. Eventually moving out and renting bother sides. Punching the numbers seems to be good cash flow opportunity overall even with the high market we live in. 
Good idea or bad idea? Should I leave as is and not spend money on upgrades other than paint and other cosmetics? 
This would be a first time in this process for us, any tips or insight would be helpful from those who have done it. 

@Charles Conroy

You'll have to look at the quality and costs of the upgrades. What people put in their primary residences usually is a higher quality than they would put in a rental property. The best gauge would be to look at other rentals and what level of quality people tend to expect. Examples - wood floors vs. carpet. Stainless steel vs. white appliances. Quality of the kitchen cabinets. Quality and style of the counter-tops.

And then you would have to look at if there is a differential between top rents and interior condition. If you can't push the rents up with the upgrades, then stick to the basics.

If the property can compete at market value rent with the properties that surround in its "As-Is" state,  then yes, slap on a coat paint, replace the carpet, shine the hardwoods, buff up the walls and replace the wall sockets and the door knobs.  HOWEVER, if the property can't compete, then do NOT attempt to rent it out.  Take the time and renovate one side, live in the other.  Then move out as you renovate the other side. 

Both of these guys have the right idea. If you are choosing to live in the unit, then be sure you still treat it as an investment. Be sure you know the value of the upgrades when considering the house as a whole not as a residence. If you do that, it should be a good deal and a good start for you. 

I think this is a great idea. In fact I'm trying to do the same thing myself because of the high cost of entry to SFH's in the area and I'd like a little help on paying the mortgage month to month. In addition to what @Christopher Phillips said I'd make sure your exit plan is solid and can withstand the few years of rehab time it might take (just making that time frame up, maybe you'll be much quicker). 

I was reading through this thread and was waiting for someone to go after the retail part of the thread.  @Dennis M. Thanks for coming through and not disappointing!

I generally try not to buy things at retail.  However, given how the market has been, almost everything I'm seeing is trading at retail or above.  If you can make money after you renovate (if you decide you need to) and rent out both units, I'd say go for it.

@Charles Conroy buying retail is fine if it works for you. Trying to get a deal on too many fronts often means you end up with no deal or a bad one because without experience you don't know a good deal from a bad one. Fix the property for the kind of tenants you want to attract to live there. Personally my mistake was not using nice enough finishes when I started out. I read all the posts about how Formica is "good enough" for tenants. I ended up with "good enough" tenants. When I spent a few more $ on finishes I got the good tenants while everyone else was dealing those that were good enough. Now days everyone watches HGTV so they want (even expect) the nice stuff too. I would avoid the thinking that "this is what I would want so that's what I'll do. Do some market research and see what's really expected by the kind of tenant you want to attract. Keep in mind, the large big box complexes often do lots of market research so their units meet customer demand.

Congrats on the investment! I'll join the conversation but debate the retail part. 

What neighborhood is the property in? How did you purchase it, cash, finance, creative? What is the projected cash-flow? Denver is insanely competitive right now. SFH, nice neighborhood, sell for $300k in trash condition.

@Charles Conroy

Without more details, it's tough to answer whether a market-listed duplex in Denver is a good buy or not. And hard to say without seeing the unit and knowing its location whether you should put some money in or not. As with so many questions here on BP, the answer is a frustrating ... "it depends." 

I think @Bill S. makes a great point about the inaction that comes from too many supposed deal pipelines. Keeping focused and taking action is important, so if just focusing on the MLS works, then great. (Side note: I would be interested to see what kind of properties you're seeing, because it does seem tough to make an on-market Denver duplex truly cash flow once you consider all the repair and capX savings. Anyway, maybe you've found a decent place. Would love to know more.)

Also, to supplement what @Brent Crosby said, it's not timing the market, it's time in the market that matters. So if you're holding this duplex for the long-term, you're probably going to do well. (That's a personal opinion based on my affinity for Denver as a long-term buy-and-hold investor.)

I wish you luck!

@Charles Conroy I did this 16 months ago in Denver. It turned into a bidding war. Looking back I likely overpaid and the market has cooled off a little, which hasn't helped. Both units were renovated to different levels of quality roughly 15 years ago and I chose not to upgrade and move in / rent, as is. That said, I live in the nicer 1st floor 1br/1ba unit and rent the upstairs 2br/1ba on Airbnb. Airbnb pays 80% of the mortgage and has an average yearly occupancy of 75-95%. The issue I'm having now is the exit. LTR structured the right way will barely cash flow. I'm thinking now, due to some great guidance on BP, to leverage medium term furnished rentals as a way to exit and sustain higher cash flow.

Couple takeaways I’d point out:

1. I did my first deal and learned a ton about owning a rental including how to successfully navigate Airbnb. My duplex is in an emerging part of Denver, so long term appreciation should be good. Definitely don't regret it.

2. However, I didn’t spend enough time upfront really analyzing the exit prior to buying. Thought that Airbnb would be an option and clearly regulation is moving further away from friendly.

3. Airbnb is the most profitable option, which you could totally do in your situation. The condition of the unit is important, but not as important as you may think. It’s all about supply/demand. High demand in Denver and dwindling supply due to regulation.

Good luck and have fun!

Originally posted by @Jason Breton :

@Charles Conroy I did this 16 months ago in Denver. It turned into a bidding war. Looking back I likely overpaid and the market has cooled off a little, which hasn’t helped. 

This is exactly why I push my people into SFR. Prices are more reasonable, house hack is a great way to learn about being a landlord, and they are easier to sell. People that bought over the past 2 years will find it difficult to exit with cash on their purchases unless they put a lot down. The market is definitely swinging back towards the middle.

 

Typically, unless the buyer/investor has years of marketing or sales experience, paying the retail MLS price is the only viable option.

Sally works at Widget Express, as the Assistant Director of Marketing. She works hand in hand with the sales division to ensure that the marketing a) gets consumer to reach out to WE's sales staff and b) sets expectations so the sales staff can close on those 'leads' and sell Widgets.

Sally does this for a living, day in and day out. It's not rocket science for Sally to apply what she already knows (she reads reports daily about the latest and greatest in marketing) and get a great off-market deal. She's going to market to find motivated sellers, and she's probably reasonably competent at the sales side to close on that purchase for below market value. Sally has an unfair advantage in that area.

Fred thinks he's going to pick up a book or spend a few hours listening to podcasts and repeat Sally's achievement. Fred might pull something off, in which case good for him. But, more than likely, Fred's going to be spinning his wheels while his local real estate market appreciates another 15%, if he insists that a book can replace Sally's years and years of full time day-in day-out experience and expertise. Whoops.

Fred, however, does something for a living that gives him another advantage. Finding what that unfair advantage is, and capitalizing on it, is probably where Fred will kill it. We'd have to know Fred's experience to help him identify that. OP, I didn't see where you mentioned your background.

Sales and marketing makes up like 15% of the working US population, but they easily make up >90% of the deals that cross my desk wherein the person got it for 20% or more less than the appraised value. Of that remaining 10%, most of them have a "not technically sales" sales job... a high school teacher is "selling" those kids on studying and doing their homework on a daily basis, for example, and on the notion that Algebra isn't mysterious witchcraft, in fact it's something that you can understand and apply to your daily life.

Originally posted by @Charles Conroy :

@Chris Mason "I didn't see where you mentioned your background".

I'm a firefighter/paramedic as a day job. I've land lorded before but never bought a property specifically for investment. Goal is to purchase next spring for that. Learning phase now. 


Now is a better time to buy something if you have the means as pricing is lower, and there are deals to be had. Prices will jump up in the Spring, and rates are phenomenal right now. One of my lenders just quoted me 3.125% today on a 10/1 ARM. No one has been able to touch her pricing on that product.

I'm closing next week on another rental about $100k below market. It will take about $20k to hit that ARV for the refi. CF will be around $600 per month. Like I said, there are deals to be had.

 

It's a business....you make your money when you buy because market rates dictate your monthly gross and that's all the math you need.  To a renter...a 3/2 is a 3/2 as long as it's in the location they want and priced like all the others in that area.  If a thin margin works for you, then your question is moot. 
If you're a handyman, then your operating costs will be lower than if you hire out...simple math again.  Example: it costs $20 to buy a Moen cartridge for a shower mixer and one hour of your time to replace it.  It costs $150 to hire licensed plummer to do it.  Same thing, you make your money when you buy.
If your profit margin at the end of the day is 30% then you have to earn $3 to put one in your pocket.  If you save $3 up front by spending less, that entire $3 goes into your pocket.