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.
Good info @J. Martin …thanks !!!
@J. Martin - I would love to be able to make the first a fourplex, but don't think I'll have the funds to make that happen at this point. Definitely down the road! That is great info. I was under the impression electric would all be on one meter ad water would be split up. I'd guess it could be different everywhere. But I'd think it's fair to at least make the tenants pay some of those utility bills.
I'm looking for cash flow, but at the same time, if I'm planning to hold the property for awhile until I can "trade up" (like playing monopoly, 4 small units first and then trade up for a bigger one), maybe the duplex wouldn't be the best option for down the road? Like you said, a duplex would likely be more difficult to sell down the road, or at least would likely be sold at a lower price. So would that be a good reason to look at a SFH home instead as the potential profit from selling it down the road could be greater? (I know that is not guaranteed and is purely speculative, which I'm trying to avoid).
I think with the right deal I'd lean towards the duplex at this point because I like the higher cash flow and the idea of having someone still there to help pay the mortgage during a vacancy.
Almost all of the multifamily units around here (SouthWest Florida) are separate meters for electric and water, tenants become responsible.
The only time I don't see separate meters is when the house was converted, single family with the garage turned into an efficiency, duplex with shared garage turned into a third unit... stuff like that.
Our first RE investment was a duplex. It's a great way to start. We now own 2 duplexes, an 8-plex (4 duplexes grouped together) and 3 SFH.
Check your local utility requirements. Here's a snapshot from our experience.
GARBAGE: Garbage/Recycling. In our municipality, all residential units must have garbage/recycling service. SFH garbage/recycling can be in the name of the owner or tenant. We require our SFH tenants to establish service in their name and pay for it. Multifamily garbage/recycling must be paid by the owner. We pay on all our multifamily properties and factor the cost into our rents. This utility will put a lien on the property if not paid. We have separate bins for the duplexes and a shared dumpster for the 8-plex.
WATER: Water/Sewer. If separately metered, we have tenants pay their own. This utility will put a lien on the property if not paid, so the utility provides us with a copy of the bill. We monitor usage (a spike can indicate a water leak or the move-in of unauthorized tenants) We watch to make sure the tenants are paying their bill.
ELECTRIC: Separately metered. This utility will chase the tenant and will not put a lien on the property for unpaid bills. The electric company will not share with us any information about the account other than the name on the account and start/stop dates.
NATURAL GAS: Separately metered. No lien on property, will go after tenant. Will share only name on the account and start/stop dates.
TELECOMMUNICATIONS: Optional for our tenants and totally their responsibility to pay. We restrict what can and cannot be done on our properties after too many installations gone bad. It's hard on a property to have tenants switching from cable to dish/satellite to broadband at each turn of the property. We're considering adding value to our 8-plex by providing cable.
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Some landlords will handle all utilities and then send a bill to the tenant for their share. Others will cover some or all utilities and factor the cost into the rent. Some add a separate utility fee in addition to the rent.
Regardless, the energy and conservation ideas mentioned in other posts are worth looking into. Some utility companies give away free conservation kits and rebates for energy star appliances (furnaces, refrigerators, etc.).
On utilities, you also have to look at what is the common practice in the marketplace and what renters are conditioned to expect. Even if you can separately meter everything and pass the cost on if the common practice in your market is to have the owner pay then you risk losing renters.
I recommend starting with looking at other properties to determine what renters in your market expect. If the owner usually pays then build that into your proforma financials when analyzing a deal prior to purchase.
@Marcia Maynard - Awesome info! Thanks a lot!
@Jason Munck - Great point, I'll have to look into that.
So here is what I am looking at:
Duplex - Asking price is $64,000 (from a turnkey company - I assume they don't negotiate on the buying price??)
Rent - $1,350/mo
Vacancy - $135
Operating Income = $1,215/mo
Taxes - $106.67
Insurance - $60
Management - $135
Legal - $25
Maintenance - $135
Other (Utilities-Trash, etc) - $100
Operating Expenses = $561.67
Net Operating Income = $653.33
Debt Service = $257.67
Cash Flow = $395.66
LTV = 75%
Down payment = $16,000
Closing Costs ~ $2,000 (really not sure about these)
COC return = 26.4%
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SFH - Asking price is $59,000
Rent - $825/mo
Vacancy - $82.50
Operating Income = $742.50/mo
Taxes - $85.75
Insurance - $45
Management - $82.50
Legal - $25
Maintenance - $82.50
Other (Utilities, Misc) - $50
Operating Expenses = $354.25
Net Operating Income = $388.25
Debt Service = $253.38
Cash Flow = $134.87
LTV = 80%
Down payment = $11,800
Closing Costs ~ $2,000 (really not sure about these)
COC return = 11.7%
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Am I missing anything in these analyses? What else should I consider? The duplex seems like the best choice (not only for COC returns, but cash flow is higher, and also for other reasons discussed earlier in this conversation). But I have to look into whether all of the utilities are metered separately.
The biggest difficulty comes down to the duplex has to have a 75% LTV (which means a higher down payment, which would be most of my cash on hand).
Any thoughts here? Thanks!
On your question of cash outlay I think it's totally worth it to pay a little bit more cash to get something that will earn you a much better return. Assuming your numbers are correct, the extra cash flow from the first property ($396-$135) will pay you back the extra downpayment in about 16 months. That's a fairly short time to get to break-even on the two investments and a small price to pay for something that will keep on giving you a better return well into the future.
The other thing to consider is your opportunity costs. If you go with the second property what would you do with the the extra $4,200 over the next 16 months? If nothing that supports going with the first property. If you could put it into a really high yielding investment than consider the second property and make your high yielding investment with the $4,200. However, in this case that probably won't make sense. After some quick calcs, if you buy the second property and invest the extra $4,200 someplace else it would have to earn a 78% return so that your entire 18,000 would equal the yield on the first property.
Also note that my comments above do NOT take into consideration qualitative factors such as the condition of the property, how nice the neighborhood is, etc. Not mention if you just need the cash in your pocket to live! My comments are purely quantitative.
@Jason Munck That is a great way to look at it. I always try to look further down the road, and that's why I think the duplex totally make sense. But after the down payment and the closing costs, I wouldn't have much left for reserves in case anything happened, not to mention having to pay the mortgage/bills. I'd consider maybe a short-term loan just to help with reserves that would be able to be paid back quickly with that cash flow. I think lendingclub.com or something like that could offer a rather low-interest loan that I could pay off quickly. Partnering up would also maybe work, but I was thinking of doing the first one on my own.
Oh, and even though I've never worked with a turnkey company I wouldn't just assume that they won't negotiate on price. I would still ask and try to negotiate. You never know.
Hi Rodney! I'm a bit late to the thread it looks like but my thought is that you are considering the pros and cons for SFR versus a duplex great. The big thing I would say is that it doesn't matter which of those is the better 'first investment' as far as type. They are both good ways to go so it just depends on what is most comfortable for you. Duplexes are great because the cash flow is higher and if one side is vacant the income from the other can cover it. SFRs have better exit strategy options though and may attract a higher quality tenant. So it's all a trade-off and I think you should go with which one gets you more excited.
A comment about tenant quality though- you are correct to be concerned with it. Tenant quality has everything to do with the profits of an investment property. However, the quality of tenants won't be that dependent on whether the property is a SFR or a duplex as it will be dependent on the price ranges of properties you buy. Based on the numbers you give, you are looking at lower income areas which will increase your risk for lower quality tenants.
@James Mudd Having the utilities split up is not really upto the power company. It depends on the city and your zoning. If the unit is zoned MF and you want to pay to install the extra meters the utility company will oblige. On the other hand some cities might not like that because utlities and addresses feed into the emergency and 911 system and reallocating those is a headache for some localities