Property analysis- What is your opinion on this duplex?

17 Replies | Austin, Texas

Hello, so I am doing my research and using the free tools available on the site (for a minimum amount of time) to analyze duplexes. I picked a random duplex and did an analysis. Unfortunately, because I am not a paid member, I cannot share it with you. However, here is the link to the property https://www.realtor.com/realestateandhomes-detail/...

With a 20% down, there is negative cash flow for many, many years. I do have some questions:

a) Using this particular property, what would someone have to do to get a positive cash flow? HIgher downpayment? HIgher rentals? Thoughts?

b) Also, when doing the analyses, I used the $1500 rental income (one side of the duplex) because I would be living on the other side. Is that the correct way to do the analysis?

Thanks

I would do the analysis as if I weren't living there. Unfortunately for a $580k property, I know $3000 a month won't cash flow either.

A higher down payment will allow you to cash flow. It will have to be an enormous down payment though. 

Where did you come up with the $1500 rental income for each?  You need more down payment, but even then, you’re going to be living in it so it won’t cash flow how you want it to. It will be a tenant paying a position of your mortgage.  Your value will be in holding and owning more house for what you pay.  

@Renee Burke I agree with @Andrew Allen , this property won't flow even if you rent out both sides. The main issue, I think, is that this looks to be a very A area, based on the info provided on the listing. Meaning this is where people with money live, and everyone else wants to live. Looking at the prices of the surrounding props and the school ratings, this looks like an area for appreciation plays, not cash flow investments. You very rarely find an A property that cash flows well, because of the exact issue you see here - you PITI (principal, interest, tax, insurance) is far too high. With a price of $500k+ and rents of only $3k (if you rented both sides, but not sure where you got this figure) you're not going to make the numbers work. I am certainly not a 1% rule purist, but you can't be this far below it and expect to make money monthly.

Plus, since we're nearing the top of this cycle, I would say you'd be buying at the top of the cycle in an area that's already seen a lot of appreciation (almost 60% since 2009 based on the listing history). 

If you're looking for cash flow, you'd be better served looking one step down, in solid B/B+ areas. That's our bread and butter because we know from experience that high tier props don't flow and lower tier props are more work than they're worth.

Good luck!

Out of curiosity, I did a little Google Earth walkabout in this neighborhood, and I guess I need to walk back my 'A area' comments. This looks to be a B area after all, which means either the rent is too low or the prices in this area are all out of sync with the quality of the properties. Austin is not my market, so I can't give any more in-depth analysis. My initial thoughts were based on the info provided in the listing, but I'm looking at this street with pavement that needs mending and older cars etc and not seeing an A area. Perhaps Austin is inflated and housing prices just aren't conducive to investing, but I know many people like this market. So perhaps the rent rate you're using is too low? 

Austin proper buy and hold (excluding value add opportunities) investing strategy does not lend to cash flow today but rather appreciation and cash flow down the road. Look to outskirts if you need cash flow today. 

Thanks for validating my thoughts. Regarding rental income, I looked online for rental estimates in this area and the rate returned was $1500. I personally think it is low. I live in Austin and I would consider this a B+ or A area.

Austin proper buy and hold (excluding value add opportunities) investing strategy does not lend to cash flow today but rather appreciation and cash flow down the road. Look to outskirts if you need cash flow today. 

I know the area and it’s very close to A areas so yes, I can see why the pricing, etc.  But the only thing that I can think will attract solid renters there is because of the school.  And even then I just don’t see someone with money and kid(s) want to rent there. Neighborhood is so tucked away and  the home isn’t in top shape for that market to attract such tenant.   You’re better off finding another location.  

I would never put in more cash to get to positive cash flow.   There is opportunity cost with those cash - better off use cash on other investments.  This property would NOT cash flow no matter what, only hope is appreciation.  Now is already near top of the cycle.  

Another suggestion is for a near A area with good schools (family renters), then have at least 3 or more bedrooms.  You get better family and longer term tenants with that extra bedroom.  Some people might disagree with me, but I would not buy 2 bedroom properties in A area with good school as your tenant base is very limited.  Tenants will have the money to afford 3+ bedroom.

@Renee Burke you're going to need to find something that has better numbers.

Most likely you'll need to put down a decent down payment and do some rehab to find the numbers you want.

I watch several markets and I'm not seeing turnkey properties in great areas work anywhere. If it were that easy it wouldn't be any fun!

@Renee Burke   I did a little digging on this duplex. Cat Mountain is absolutely a prime "A" area.  The taxes are at $10,800 and insurance will likely be around $2,500. So your monthly TI is about $1,100. 
At $500K purchase price and with 20% (100K) down, assuming 4.75% fixed 30 years rate you're looking at $2,085/month in PI and a total $3,185/month PITI.

I have found a duplex unit nearby, 2bed/2.5bath of similar age, construction and condition that was rented for $1675/mo early in 2018. Chances are you might be able to lease your units at $3,300-3400/month total. So your rent will cover your PITI if you were to rent out both units. Here is your 1% rule, if you believe in rules like that.

Of course, there are all kinds of other operational expenses like maintenance, replacements and occasional vacancies and turn-over expenses to deal with. And that presumes you'll self-manage or you'll be spending a good chunk on management too.  

The concern already echoed by other posters is - we're at the top of a 9 year long rising market that is due to adjust. Specifically, it's the rent adjustments that could hurt you. For instance, a 15-20% drop in rental rates could turn this barely breaking even duplex (if that) into a $500-$600/month negative cash flow proposition. This in turn, translates into a $6,000-$7,000/year in negative cashflow that could last for 3-4 years.

If you can sustain that you should be fine. During the same 3-4 years you'll be paying down your principal by about the same $6,000-7,000 per year. You'll also have a significant tax write off against your other income from this property. Eventually rents will (likely) rise and surpass present levels. 

In this prime location you'll likely have a lot better quality and longer staying tenants than in most other cheap places that might yield better cash flow in terms of price-to-rent ratio.  

Buying a property like that is making a long term (15-20 years) commitment to shooting for appreciation and wealthbuilding through a mortgage pay down. You will eventually end up with a free and clear property that will be worth at least $500K and likely a LOT more. Austin isn't a bad place to play this game. 

If a plan like this appeals to you, this may not be a bad property to buy for someone who isn't yet a sophisticated investor but has patience and resources, like credit and income to last through a potential downturn. 

For a more advanced investor there is likely a A/B condo conversion play available with a renovation  budget for modernizing the units and selling them separately. There has been a recent sale of a similar size 1/2 duplex unit in the area for $299K. For this strategy to work the property has to be acquired at a lot better price, or held for a few years before the renovations and resale. 

Happy bargan hunting!

@Renee Burke You should also consider the timing of your lease offering.  Posting the open unit for lease in July will get it leased in a handful of days.  Offering it for lease in the winter will take 2-3 months.  Be prepared to eat an extra $4500-$6000 while you find a great tenant.

You're burning too much bandwidth on this. If you look at a deal and it doesn't fit your investment criteria, don't adjust your criteria trying to make it work. Dump it and move on to the next opportunity. By the way, I'd argue that your purchase price is more than double what it needs to be to make money in this market. Carry costs are far too high on a property this expensive. Any vacancy whatsoever will eat your profits with interest and taxes. Plus, it's already upside down!