Is it worthwhile keeping the duplex

27 Replies

All, I am leaning more towards selling my Duplex.  Here are my numbers:

After all the expenses, my take home is around $1600/mth. The property appreciation is around 4% / year. This is low as compared to SFH. Not to mention all the headache dealing with the tenants, repairs, etc.

If I sell the property, I will make (after cap gain tax @15%) around $550k. If I invest that amount in a good dividend paying ETF @8% pa I will make $3600 per month.

Am I missing something?  Appreciate feedback from the gurus.  Thanks in advance.

@Mark Vesu

The tenant headaches and “take home after expenses” tells me your duplex is most likely in a C-/D neighborhood.

If you find anyone that’ll take it and truly net what you think you would,sell it.

Hi@Mark Vesu , when deciding any important financial decision always reflex on the goal you are trying to seek.  

First ask yourself Why did I buy the duplex in the first place:  What was I trying to achieve.   Then ask yourself Why am I trying to achieve this goal.  Your real return on your duplex is net cash flow each month and the appreciation of your real estate each month.  If we take the current value of your real estate 550k plus the capital gains tax of 83k then the value of your duplex is approximately $633k.  4% appreciation is about 25k a year.  Plus you have to add the cash flow net each month 19k per year.  Total return on your real estate is 44k per year.  This gives you about a 7% return each year on your money vs 8% from stocks.  

Now to be fair you have to calculate your taxes associated with your real estate vs stocks.  Real estate is a tax efficent investment.   So, you will pay less taxes than you would with like results with stocks.   

Now the pros and cons.  With your investment in real estate, if you are the property manager you will require more management and possible frustration vs stocks.  However,  I believe stocks are more volatile and your emotions in a downturn may make this investment in stock  a big negative.  I have both types of investments and I like my real estate holdings better than my stock holdings but some of both is probably a good thing.  

For me, real estate provides the monthly core income I need for retirement.  It is my predicable, sustainable income and my stocks provide the additional comfort and ability to buy luxury items if you will.  Cheers.

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Real estate will always continue to grow value as an asset. As opposed to parking your $$ somewhere and getting a monthly dividend......

Maybe you can sell and buy a SFH to turn into a vacation rental in a nicer neighborhood......?

How about you cash-out refinance the duplex, hire a management company, and then invest the money into an index fund?

OR...sell it with a 1031 exchange and buy a higher performing property.

The stock market is fickle in the short-term (most investments are), but if this is a "next 30yrs" are likely to see exceptional growth in either vehicle, but less taxes in real estate.

The only problem is as opposed to SFH appreciation (29+% this year), the duplex is stable or less compared to two years ago - YoY appreciation is around 3%. People buy SFH for appreciation and buy Duplex for cash flow.

I love long term holds and thats our niche, but at that level of gain I'd probably sell, 1031 and lock in the profit. Tough market to buy? Sure. Pressure of 1031 limiting? Sure. I would also take a look at your market and figure out if there will be a good and appreciating market for condo conversions if you split the duplex. I think we are heading that way in general.

But you would have about $3M of purchasing power with the 535K and change equity. So if your $3M property was producing a hopefully-too-conservative 4-5% return after expenses and debt service you would have the same cash flow with an enormous amount of paydown to boot. Historically low long term fixed rate debt available. 

Screw the stocks, thats the safer AND more profitable play. Single tenant triple net maybe? Check out some of Joel Owens posts on the subject. Cant tag him for some reason.

@Mark Vesu , There's only two things missing:

1. An 8% etf that's stable, long term, and will maintain 8% if there's a correction for a period of time (prognostication).

2. A reason to pay the tax before investing. Since a 6-7% DST where you defer the tax with a 1031 probably pencils out to about the same return as an after tax 8% return on an etf.

@Mark Vesu I would recommend selling the duplex and put that money to good use in a cash flowing market with appreciation. Of course I am partial to KC but the returns are good and there is good appreciation in most of the sub markets. You could also really cash flow well with a good investment into Net Leased property (commercial property with little owner responsibility). These are recession resistant commercial properties. Hope that helps!

Thanks for all your help. These are all valid points to consider. Wrt to duplex, will spending money on quartz countertop, new interior doors, new appliances, new exterior paint, etc. (roughly 15k) get me a good ROI? The property overall is in very good condition and it is in San Jose, CA.

@Mark Vesu
The way I would determine whether you would get a better return renovating is how much it would cost to renovate compared to how much you will be able to raise the rents.  Do you currently live in half of the duplex?  Also your capital gains are going to taxed at higher than 15%.  You are forgetting that CA charges a capital gains tax.

@Mark Vesu   Spending on the upgrades may do at least two things:

1) higher rents (currently coming back from being down 14-16% in SJ this past year)

2) better tenants

Compare properties on the market with and without your proposed upgrades. Take the monthly difference multiply out by number of months to determine ROI.

Thanks for all the information.  Can someone recommend a good mortgage broker for cash out refinance?  The property is in San Jose, CA and I am thinking of taking 60% out.  Appreciate your help.  This is 100% rental - I am not living there.


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@Mark Vesu

A couple of things missing

1) If you sell the property, you lose about 10% in value right away
6% in realtor commissions and 4% in other costs(Title work, stamps, etc)

2) Rental income is likely sheltered by depreciation(no taxes) while the dividend income will be taxed.

3) You are less likely to cash-flow when the per-property unit cost is above $150,000.
In your case, the cost per unit is $275,000($550,000 / 2).

4) You may want to consider doing a 1031 exchange and get into better appreciation / better cash-flowing properties.

Best of luck

Originally posted by @J.C. Martel :

@Alex Olson, curious what you’re seeing for returns on STRs in Kansas City. I was thinking of investing on the east coast but the prices are so high, I may just turn to KC. 

 It would really depend on size, location and quality of the house/building. And, how hard you work at it. Long term rentals allow you to scale faster.

@Mark Vesu I see your thread got highjacked a bit, I have a recommendation for a broker for you if you cannot do a conventional loan but I am actually working on a cash out refi for that same loan size in San Jose right now on someone's primary home if you don't have problems with DTI like many investors and can do a conventional loan, reach out to me and I can give you some numbers or pass on the broker

Originally posted by @J.C. Martel :

@Alex Olson I would think STR would allow you to scale faster because they tend to have higher cash flow.

 STRs are labor intensive. If you have a PM manage your STRs they typically take between 20-30% of the revenue. So yes if you manage yourself they can make a bit more but you are also laying for utilities, furnishings and any time a sofa is broken or a TV is stolen you have to replace it and is a sunk cost. 

Where as if you take that some money and buy a owner occupied four plex and either cash out refi after a year or two or sell after a year or two you can double the number of units you own. Then, you own 8 units and tenants are paying down debt and you can concentrate on acquiring deals rather than managing as you scale. Managing an STR and scaling is more difficult, risky, and the reward is not worth the risk.

I had 5 str houses - regulation, the travel economy, broken furniture and demand for quick service didn't allow me to think about scaling...only managing and getting by. 

I think they can work on a small scale to make a few extra bucks but they won't make you wealthy in the long run based on my experience, who I have spoken with etc... Unless you love the service industry and serving others, it is not enjoyable. Hope that helps. 

@Alex Olson these things make sense as one of many strategies to scale. 

Personally I have my own house for my family, 3 LTRs, hard money lending, and now I’m planning to bring on 2-3 STRs in places where I personally spend $2500-5k per year to vacation. Owning STRs makes sense for where I’m at, but I definately hear your points. 

Updated about 2 months ago

No votes yet @Alex Olson these things make sense as one of many strategies to scale - essentially you are proposing to start with an owner-occupied 4 plex, then BRRR into a 6 plex. Personally I have my own house for my family, 3 LTRs, hard money lending, and now I’m planning to bring on 2-3 STRs in places where I personally spend $2500-5k per year to vacation. Owning STRs makes sense for where I’m at, but I definately hear your points. I may consolidate my LTRs into multiplex soon too. In some ways, our strategies align.