First rental property - duplex vs. SFH ??
Rental Property Investor · Fishers, IN · Member since 2013 · 381 posts · 69 votes
I am looking into buying my first rental property. I've been in contact with a few different people who have companies that provide turnkey properties to investors. This intrigues me as a way to find a stable, positive cash flowing property to get me started.
As I was looking at properties and crunching numbers, a duplex seemed like not only the most monthly cash flow, but also the highest COC return. But I was wondering if anyone had an opinion on whether a duplex or SFH would be best for a first rental purchase? My concern is simply that renters for a duplex wouldn't be of as high of a quality/less reliable than tenants in a SFH. Also, I'm thinking with a duplex the utilities would have to be factored in as a cost that I would have to cover.
Just wanted to see if anyone had opinions on whether one property type was better than the other for a beginner investor just trying to get his feet wet? Thanks!
Hi Rodney,
looks like you came to the right place for advice - there are several really good answers here to ponder over. My first investment was a duplex - though I lived in one side of it. Eventually I moved and rented out both sides.
Some of the advantages I found in my experience was the ability to cover the bulk of the mortgage with only one unit. If one tenant did not pay the rent, then at least I had another rent check coming to help cover the mortgage. This, to me, was one of the greatest advantages - I felt secure that I would be able to cover the mortgage payment each month. With a SFR, you don't have much wiggle room for slow or no payments. If your tenant does not pay, you must cover the entire mortgage on your own now - If your evecting, this may continue for several months - with a duplex, at least you would have another rent check to fall back on.
Also, when you consider taxes and insurance - it would cost more in taxes if you purchased two homes and paid for two insurance polices Vs paying taxes on one property and only one policy. So you cover those things under one roof. Cost of acquisition is doubled also since you would be have to buy two houses. ( I know you are just comparing a SFR to a duplex - not two houses, but assuming you plan to acquire more )
This is why I have a personal preference towards multi family units over SFRs. That doesn't mean there aren't some great deals out there with SFRs - at the right price and location, there are several great investment opportunities with them - but given the choice, side by side, I would rather buy and hold a multiplex - which in my area are actually in high demand now.
Some obvious disadvantages are if both tenants stop paying rent, your going to have a big nut to crack - and as others have mentioned - multiplexes usually have the water lines tied to one account / meter and the owner is typically responsible for water payment ( unless negotiated in the contract). Also because usually all uits are the same age, you have the same thing go wrong around the same time, costing double for repairs -
Ex: one 20 yr old AC unit goes bad - two months later, the second 20 yr AC unit goes out.
so those are things to think about...
As a first time landlord 3 tenants may seem a little intimidating at first, but you may find that much like wild animals, many times they are more scared of you, than you are of them - just don't let them smell blood, cause they can still be dangerous. But, with a little practice, plenty of communication, and proactive landlording - you'll be looking for as many tenants as you can get- Good luck with your investments - always re-run the numbers and account for the unexpected ( like replacing a HVAC unit..or two) Keep us updated with what you decide. Best of luck to you.
Hi Rodney !…are you planning on living in one side of the duplex? If you do, you may possibly be able to essentially live their for free. Imagine the cash that will free up for more rentals!!!
Also, as far as your renters go…that depends on your screening process. Just because it is a duplex does not mean they will be bad renters. Even if it was a SF, they are still "renting" the house. There is no ownership. Look at all the people that live in apartments…many good renters there.
Cash flow can be very good if you buy right…good luck !!!
@James Mudd Thanks for the input! I am not planning on living on one side of the duplex. I just bought a residential house about 2 months ago (that's what started my interest in REI). I don't think my fiance would like moving into a duplex this quickly after we moved in to our house. Haha.
I think you make a good point about it depending on the screening process. What do you think about how utilities would be divided on a duplex?
I would recommend single-family until you get a good bit of experience. If you make a mistake on buying a MF and need to sell it to get out of a bad deal or negative cash-flow, the only buyers are going to be investors. And they will be buying based on your poor cash-flow.
"Ah, but these have good positive cash-flow and I've looked at the numbers and done my analysis" you say. Yep, that's what I said too. Ask me how I know.
That is a very good question from which you will hear a diverse range of opinions.
My philosophy over the years has changed. I bought my first property, a 4-plex, about a mile away from Florida State University in 1993 when I was 23. I paid $110,000, and the units rented for $450 per month, and I lived in one of them. It was a very sound investment, but like many first time purchasers, I was contemplating a check coming in every month rather than fully examining a long term picture of my goals.
In the current economic situation I am not a big fan of excessive leverage. I'd rather have $20,000 in my pocket after taking my time to find a great deal that I can flip quickly than $200 per month answering tenant calls. Wash, rinse, and repeat - then pay cash for a rental when you have a place to park your money when you have more than you need.
In other words, buy a great deal in terms of market value with built-in equity.
The question is very much locally specific. My short answer to you would be to not rule either a choice of single family or duplex out. Try to envision multiple possibilities for your investment. Perhaps it is currently undervalued. Perhaps it has excess acreage and a potential land kicker for subdivision or infill development. Perhaps you have a built-in lease purchase buyer with a substantial deposit on his hands ready to buy into the deal with a guaranteed profit to you. Kind your mind and your options open to the possibilities.
…as far as the utilities go…I believe that is paid by landlord…not sure how you monitor over usage…good question…anyone have input on this..??
@Bryan L. - Yeah, that's sort of what I had in mind with this question. All of the numbers look great. But they won't look great if there is a higher vacancy rate, more repairs, etc. And like you said, if it's not cash flowing like I anticipated, it would be a lot harder to sell as only an investor would be interested. Thanks for the input. I take it you had this scenario play out by the way you were explaining things?
@Steve Chaisson - Thanks for the response! If I'm understanding what you are saying correctly, it's that you would consider it a better option to use the cash I have on hand to buy a property with a lot of equity now to potentially flip/sell it for a capital gain rather than have the passive cash flow coming in? I've definitely been thinking about going the flipping route. I know it's good to have several exit strategies in place before going into a deal. I can't figure out how I would make it work if I were flipping a property but couldn't sell it. I would have to borrow the money for the rehab costs from a private or hard money lender as I don't have the cash reserves on hand for that. So if I couldn't sell it and the loan became due, I'm not sure I could work my way out of that deal. Do you have any insights on this? (Sorry if I misunderstood what you were getting at with your response).
@James Mudd - That's the impression I'm under as well since I think there would only be one electric bill for the entire property. How much should I estimate for utilities (electric, water, trash, sewer, etc) for a duplex to analyze the investment?
Welcome. Grew up in a 2 family, first house was a 2 family. A 3 family is even better for cashflow. Do not id yourself as the owner rather helping out the owner. You can get a ARM certified property manager to manage and fill the property for you. Search IREM.org for one.
Check out the Start Here page http://www.biggerpockets.com/starthere
Check out BiggerPockets Ultimate Beginner's Guide - A fantastic free book that walks through many of the key topics of real estate investing.
Check out the free BiggerPockets Podcast - A weekly podcast with interviews and a ton of great advice. And you get the benefit of having 40 past ones to catch up on.
Locate and attend 3 different local REIA club meetings great place to meet people gather resources and info. Here you will find wholesalers who provide deals and rehabbers.
You might consider Niche or Specialized Housing like student housing. Rents can be 2-4 times more. Remember you don't have to own a property to control it.
Good Luck
Paul
@Rodney Kuhl The 50% rule will help you do a quick and dirty analysis on the rental potential of a deal. You can look it up here on BP. As for which way to go, that depends on what your goals are. Real Estate makes money three ways: Cash Flow, Equity Buildup and Appreciation. If you have a long horizon, they are all your friend.
I'll agree with @Bryan L. but give you a little different angle to think about. If you don't want to hold a property for a long horizon, a SFR has a better chance of appreciating in a few years than a multi-family does. I think that's why some people choose to own a portfolio of SFR's rather than a single multi. If you want to "trade up" to a bigger property in a few years, the SFR will potentially appreciate more than the multi will and the pool of potential buyers for SFR's is bigger.
Good luck!
@Paul Timmins - (can't seem to get the @ hyperlinks to work...)
Thanks for the advice! I definitely went through the UBG my first couple of days on the site. I should go back through that again. Definitely a great free resource!
Just discovered the podcasts probably 2 weeks ago. I'm currently on Show 21. Listen to it while I'm driving to and from work every day. Fantastic stuff on there. Learn a ton.
I attended a local REIA meeting as well as some other MeetUp events and that has also been a great way to learn as well as meet people.
I well definitely continue to do more of that stuff. Thanks for the advice!
It's interesting you mentioned student housing. I thought of doing that even before I started learning more about REI and was on BP. Living in the Indianapolis area, there are several campuses: Butler, IUPUI, U of Indianapolis, and Ivy Tech. I thought that would be a great way to ensure always having tenants in place. How can student housing be 2-4 times higher than normal rentals? I hadn't heard that before but that definitely intrigues me!
Would you say maintenance repairs would be estimated higher at a student housing rental as opposed to a rental for a family?
@Wade Sikkink - Thanks, Wade! That makes sense too. I think what I'm gathering is that there isn't really a right or wrong way to go with either, as long as they both are good deals. I definitely would agree with your reasoning that a SFH would have a greater chance at appreciation. My long-term goal would to have enough cash flow to replace my income (haven't figured out the shortest time frame I could accomplish this in yet). My thought was to get a sense for what passive cash flow would feel like, having that come in every month. But at the same time, I guess I was thinking along the lines of Rich Dad and simply to start small and trade my way up (play monopoly). In that case, I guess you'd say the SFH home would be a better start? And then after acquiring a few SFHs, possibly trading those up for something with a great cash flow (duplex/triplex/etc)?
I used the 50% rule (and then some) to figure out expenses. I guess I'm not sure of if that 50% rule takes into account the differences between a SFH and duplex - i.e. paying for utilities in a duplex as opposed to having the tenant pay for utilities in a SFH. That would have to be an extra cost, no? (I could be wrong in assuming the assignment of those fees in each case).
Passive income is great, but playing the leverage game is a risk. For wealth building, the leverage betting odds are in your favor at this point in history with cheap money available and a lot of decent deals out there, but there is always risk in accumulating debt and you limit your mobility to purchase more deals with every new one you acquire unless you have significant capital resources.
In rural west Tennessee where I grew up, I would only purchase property at a very, very steep discount which is often possible. You can often find distressed properties in the country for less than $10,000. It's hard to get hurt there.
You will have a wide variety of investment options in Indianapolis. I would really start to dig in like a wholesaler and develop a streetwise sense of what things are worth and what they trade for. Don't get buck fever, but be ready to strike anytime you find something that can move quickly.
A nice play that I've made twice in the last couple of years is a solid duplex flip. The beauty of those deals is you can list them while their paying the mortgage.
For example, a wholesaler picked up a duplex at auction a couple of years ago when the market was extremely soft. It was a 4/2 on each side with one unit rented at $1100 per month. He made $7k on a $77k wholesale flip to me, and I made $21k selling it simultaneously to a songwriter friend of mine who in turn listed it with me for $135k. It's nice having an income stream rolling in on a flip deal. We sold the property for $130k within 3 months, and my friend netted over $20k.
My primary advice is buy equity up front and have the ability to make money selling it if you need to. At the same time you need to get really active and learn what equity really is and the subtle nuances of value, not what an opportunistic individual selling you something instructs you regarding value. Actively study comps and visit properties that sell to soak in what stuff really trades for around you.
Rodney...nobody seems to want to answer that utility bill question…lol…I'm really curious about that one too. Anyone?
To make the @ work, do the following:
Hold down the shift key and type the @?
Below this box, you will see a list of names. Click on the name of the person, that you want to see your response.
Raymond
The 50% rule is a guideline to do quick analysis. Before making an offer, get the actual numbers and plug them into a spreadsheet to see what the cash flow looks like. In this example the duplex would have utilities as an expense and the SFR would not. Don't buy based on guidelines unless you are very experienced. Crunch the actual numbers.
@Steve Chaisson - So are you against using OPM? Isn't that basically what leveraging your money is, and isn't that a cheap way to start to accumulate properties? I agree adding debt can be risky, but adding good debt isn't a bad iea in my opinion. If the debt is helping you make money, then it's not a bad situation. And yes, money is really cheap right now.
I think that is great advice to jump in like a wholesaler at first to learn how to find and take action when deals present themselves. My fear/misunderstaning with wholesaling is that I don't have the cash to close the deal, so if I can't sell the deal to an investor, does the deal get stuck on me? What can I do then?
Learning comps and the areas is a fantastic idea though for sure. Thanks.
@Wade Sikkink - Yeah ok, that makes sense then. I'd have to get a quote on the utilities (should I assume I'd have to pay for electric, water, trash, and sewer? Am I missing anything?). From there I would crunch the numbers again and figure out if it's a good deal or not. Got it. Thanks!
@Raymond B. - Not sure why, but no names pop up when I type the @. Maybe my work network is blocking that part or something.
@James Mudd as far as utilities on MF, it depends on how they're metered. Some will have only a single meter which then of course, you can't make the tenants pay. If they are separately metered then it can be put in the tenants name. You're generally going to have to pay water. I've never seen separately metered water.
Thank you @Mike D'Arrigo …can you request that the energy company meter the units separately. Or is that something you are stuck with?
@James Mudd they would have to install separate meters. You might ask your utility company if they would do that.
@Mike D'Arrigo - Thanks for clarifying that!
Hi Rodney,
looks like you came to the right place for advice - there are several really good answers here to ponder over. My first investment was a duplex - though I lived in one side of it. Eventually I moved and rented out both sides.
Some of the advantages I found in my experience was the ability to cover the bulk of the mortgage with only one unit. If one tenant did not pay the rent, then at least I had another rent check coming to help cover the mortgage. This, to me, was one of the greatest advantages - I felt secure that I would be able to cover the mortgage payment each month. With a SFR, you don't have much wiggle room for slow or no payments. If your tenant does not pay, you must cover the entire mortgage on your own now - If your evecting, this may continue for several months - with a duplex, at least you would have another rent check to fall back on.
Also, when you consider taxes and insurance - it would cost more in taxes if you purchased two homes and paid for two insurance polices Vs paying taxes on one property and only one policy. So you cover those things under one roof. Cost of acquisition is doubled also since you would be have to buy two houses. ( I know you are just comparing a SFR to a duplex - not two houses, but assuming you plan to acquire more )
This is why I have a personal preference towards multi family units over SFRs. That doesn't mean there aren't some great deals out there with SFRs - at the right price and location, there are several great investment opportunities with them - but given the choice, side by side, I would rather buy and hold a multiplex - which in my area are actually in high demand now.
Some obvious disadvantages are if both tenants stop paying rent, your going to have a big nut to crack - and as others have mentioned - multiplexes usually have the water lines tied to one account / meter and the owner is typically responsible for water payment ( unless negotiated in the contract). Also because usually all uits are the same age, you have the same thing go wrong around the same time, costing double for repairs -
Ex: one 20 yr old AC unit goes bad - two months later, the second 20 yr AC unit goes out.
so those are things to think about...
As a first time landlord 3 tenants may seem a little intimidating at first, but you may find that much like wild animals, many times they are more scared of you, than you are of them - just don't let them smell blood, cause they can still be dangerous. But, with a little practice, plenty of communication, and proactive landlording - you'll be looking for as many tenants as you can get- Good luck with your investments - always re-run the numbers and account for the unexpected ( like replacing a HVAC unit..or two) Keep us updated with what you decide. Best of luck to you.
Wow…great advice and info Jay…that was just what I was looking for !!!
Good info Mike…thanks
@Jay Orlauski - Thanks for all of that input! Great point about making the mortgage payment during a vacancy. I also hadn't really considered the thought about one insurance policy/property tax in a duplex vs. two for 2 SFHs (yes, I plan to add more to my portfolio).
Would it be a possibility despite only having one meter to have the tenants pay for water by splitting it in half? At my old apartment our water bill was simply the total for the apartment complex divided up amongst all of us. This seems reasonable for water as the bill isn't as high and not as different from one place to the next (whereas an electric bbill could be drastically different from one place to the next based off usage). Would this be a possibility or would you avoid this?
Thanks for the insight!
@Rodney Kuhl , if you're comfortable with the size of the investment, I definitely recommend not a SFR or duplex, but a fourplex! That's what I did on my first deal, and it's been a blessing since. But make sure you do your homework first! I believe my tenants use about 50 gal/person/day, including adults and children, and a coin-op washer/dryer. Water is almost one meter, and electric is almost always separate and paid by tenants. Gas can vary. I pay gas on mine. I think all my master electricity, gas, water, including the washer/dryer for all units, is about $200/mo. Coin-op pays about $100 of that. So $100 net utilities to me.. (3x2/1 & 1x3/1.5 . 13 people. Hope that gives you some specifics. Utility rates can vary greatly by area though.. Plus garbage. Check your local garbage company for rates. You can also call your utility company and they can often provide you with average rates for similar building types. They told me mine is especially low for a fourplex in the area.. Must be the low-flow toilet handles I installed..?
@Jay Orlauski is right that the average expenses are less with a 4plex. One 4plex roof is probably half as much to replace as 4 roofs of single family homes. And generally have better cash flow. But not as broad a market when you go to sell. If there is a bigger "owner's unit", you'll be able to sell to some part of the pool of owner occupants in the future. Otherwise, you may just have a market of investors, which will make your eventual sale price more dependent on cash flow than the sizzle of the property or its value to an FHA buyer.
@James Mudd , I talked to a contractor about potentially installing separate meters, but with the fees from the utility to get permits for the individual meters, hooking up separate piping through each unit instead of the master pipe, and the actual materials and labor were going to be prohibitively expensive. I think this tends to be the case, unless your area has a rebate program for it. Some municipalities are giving rebates because it reduces overall water consumption when people are directly responsible for paying what they use. makes sense! Some people charge a "utility fee" on top of rent - maybe $20-30/mo/unit to help defray utility expense. I just include it in the price of the unit (slightly higher since I pay utilities), installed low-flow shower heads and dual-flush toilet handles, and told the tenants minimizing unnecessary usage helps keep the rents from going up..