Questions about a Duplex deal...living in one side

Ryan Ogilvie · 2015-03-12T17:09:28-07:00

Hey all,I am new to bigger pockets. I have already listened to about half the podcasts and have been reading the forum whenever I can. It is a great site and nice to see how helpful the whole community is. I was lead to BP by a duplex for sale I came across and wanted to find some additional info. I have been trying to decide whether or not this is a good deal for a few weeks now and am still having some trouble. I know that there are thousands of posts on this topic and I have read many of them but I wanted to get some feedback on this specific case since it would be my first time purchasing and I don't want to make a huge mistake. From trying to run numbers using BPs calculator as well as I believe Jay Scotts excel spread sheet I found on the site it doesn't seem like it would have great cash flow but it is a home I would feel comfortable living in so I would be house hacking it and the plan would be to be able to quickly save money to invest in other properties that have better cash flow. The numbers I used look like this:Asking price:260,000 Would need about $10,000 in work Each unit is 3 beds 1 bath and from doing some research should rent for $1200 per monthTaxes: $580 per monthVacancy: 8% - $2400 annualInsurance - $1000 annual, kind of a guess house is over 100 years oldMaintenance - $2000 annual Utilities - $250 annualVariable cost 12% - $3168 annualBy putting 10% down it is estimated I will have negative cashflow for the first couple years assuming I rented both units for the same $1200. I think the asking price is high and would like to know what you think. It is hard to comp it because it is a large house each unit is a little over 1500 SQF and one side has been completely remodeled. It is also in a nicer section of town then any other duplex on the market. From looking at it from a cash flow perspective I see it wouldn't be a great investment but I was wondering if house hacking it and having a small mortgage payment would off set that. I also feel I was somewhat conservative with my numbers.Any input would be greatly appreciated!

Bryan O.

Specialist · Lakewood, CO · Member since 2014 · 1k+ posts · 1k+ votes

11y

$580/month for taxes seems incredibly high. Is that per year? I'm out in Colorado and for that price home I would expect around $100/month.

$250/year for utilities seems quite a bit low. Is that per month?

How did you estimate the $2000/year for maintenance?

Vacancy rate is something you have good control over. If you are living next door I would count on much lower. You have easier ability to show and fill vacancies, and my neighbor tenants are more likely to stay because they enjoy knowing I am right next door if something breaks. I would lower that rate for my projections.

Assuming your taxes are wrong you can project positive cash flow if you rented both sides. Not much, but some. The other big gotcha is rates. Is $1200 the market rate right now? I just bought a 3-plex with not great cash flow, but because the rents were far enough behind market it was a good deal.

Is there a reason you would use 10% down rather than 3.5% with FHA? Either way you will have to pay PMI so you could keep that money aside for another property to really get cash-flowing.

Just some things to get you thinking. Best of luck in your adventure!!

Regards,

Bryan

1 Reply

Michael Germinario

Real Estate Investor · Point Pleasant Beach, NJ · Member since 2014 · 103 posts · 52 votes

11y

Hi @Ryan Ogilvie,

Your utilities number doesn't appear to be correct. Find out what landlord pays vs. tenants. Also, don't forget to include CapEx and groundskeeping (lawn care, leaf removal, snow removal). There may be a lot of deferred maintenance given the age of the home.

Also, it is a good idea to ask yourself why you are doing this and to think 5 and 10 years down the road. Do you really want to own something that cash flows negative and is over 100 years old? Your first deal may be your last if you're not thinking about the big picture. Don't settle....there will always be a better deal down the road.

@Bryan O., we're in New Jersey and we have the privilege of paying the highest property taxes in the country. Makes things very difficult for cash flow, but it can be done.

Good luck!

Mike

1 Reply

Ryan OgilviePro Member

OP

Woodstown, NJ · Member since 2015 · 21 posts · 1 vote

11y

Thanks a lot @Bryan O. and @Michael Germinario I really appreciate your inputs!

Bryan - The tax rate unfortunately is per month here in New Jersey, I may have calculated it slightly high but it will be somewhere in that ball park. As for the utilities I only put in for paying water and sewer and have the tenant pay the other utilities. I will look into that number further though to see if that is a fair estimate. The $1200 per month is slightly below market value for rents in the area of similar size and the quality of this unit is above the others I looked at getting that same rent so I feel somewhat confident in that number.

You have a good point about putting down 3.5% instead of 10%. I chose 10% because that would still leave me with reserves and would lower the monthly mortgage payments but since I am paying a PMI regardless it may not be worth it. I could put down 20% but that would leave me with almost no reserves for anything else. Any thoughts on that?

Michael - I will look into the utilities but I was only calculating for water and sewer. As for CapEx I was thinking that was covered under the variable costs but I am not sure there? Groundskeeping I was planning on doing myself but if I was to ever move a distance away that is something I should take into account.

This house is over 100 years old but is in great shape as far as I can tell. One side has just been completely remodeled from top to bottom and has yet to be lived in, the other side needs some very minor work and has also been updated in the past 7-8 years I would say. The whole house has new windows, new electric, half the roof was replaced 5 years ago with 3D shingles.

The thing I like about the deal is it is a duplex I would be comfortable living in for the next 5+ years and hopefully have a very low mortgage payment then someday down the road rent out both sides for positive cash flow. At first glance it appeared to be a deal where I could do that and after running some numbers it appears to be closer then I had originally thought so I turned to BP for some help. Even if it isn't a great cash flow producer do you still think it is better then paying rent?

0 Reply

Michael Germinario

Real Estate Investor · Point Pleasant Beach, NJ · Member since 2014 · 103 posts · 52 votes

11y

generally speaking I would rather own than rent. Just make sure you are weighing all your options for your personal situations and desired lifestyle. Do your proper due diligence and know the laws, the numbers, and your long term goals. If you do that then you will find your answer.

Good luck !

1 Reply

Ryan OgilviePro Member

OP

Woodstown, NJ · Member since 2015 · 21 posts · 1 vote

11y

Thanks @Michael Germinario

Any other feed back or opinions would also be greatly appreciated!

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Denise Stanford

Real Estate Broker · Northern, NJ · Member since 2014 · 97 posts · 15 votes

11y

House hacking is a good entry and first start for many real estate investors. There are a few positive things about your investment. The apartments are updated although the building is 100 years old. I think your vacancy rate is high, I think a 4-5% rate is reasonable since you'd live on site. It' easier to show the rental apartment and property manage. I'd check into the utilities since you're accounting for water and sewer which most landlords generally pay. I'd check into the individual utilities for each apartment. Are they on separate meters? Sounds like a good deal but continue to do your research and analysis. Buying is better than renting and what are you're saving by having rental income reduce your mortgage payment is an important consideration. Your exit strategy of within 5 years renting our the entire property and moving onto another investment sounds good.

Happy investing.

1 Reply

Mala S.

Investor · Jersey City, NJ · Member since 2013 · 129 posts · 122 votes

11y

I just bought a duplex in Hudson County, NJ a few months ago and I am house hacking (renting one unit while I live in the other).

My numbers are really tight too. I would be at about 100-200$/month cash-flow if I moved out and rented both units today. But these were my reasons for going through with the deal anyways. Some of these may apply to you so I thought it might be helpful to point them out:

1) I spent a whole year analyzing properties in my area. I even expanded my search to surrounding areas and analyzed those properties as well. I sent out yellow letters and saw properties on the mls. I made several offers and was outbid every time. My point is, by the time I found my property, I had a good idea of what was out there and what was a good deal or not, and how much competition was out there for the "good deals" (which usually ended up in a bidding war). Make sure you have done the same. You will feel more confident making a decision if you have done this.

2) I knew I was going to have to live in the property. There were many better deals in areas that I just could not see myself living in. Maybe I could suck it up for a year and live there, but 5 years? no way. To me this is reducing the amount of exit strategies I have (i.e.: continuing to live in a property if I need to is a strategy. Being forced to move because I don't like the neighborhood or my family hates it could be a big problem. I may still end up moving in 1 year. But the point is that I don't have to. I like where I am living enough to stay 5 or even 10yrs - this gives me more options to deal with life's surprises.)

3) Better neighborhood also means a higher quality tenant. Personally, I feel more comfortable with this kind of tenant. I like it when tenants are picky and check to make sure everything is working and complain right away if something is wrong. They also pay their rent on time, and keep the place clean.

4) I saw better deals that needed a lot of renovations. Despite being an architect, I just didn't want to take on a huge renovation at this time. Even if it meant getting a property under market value and gaining equity through reno. I will likely do this next time though. But this time around and bought a place that was recently renovated and well maintained.

5) House hacking has drastically reduced my personal housing costs. This allows me to save a lot of money every month towards the down payment on my next property. I would never be able to do this if I had continued renting my previous apartment and kept waiting for a "really good deal".

All that being said I would ever do a deal that has negative cash-flow. There has to be something better out there and maybe you just haven't looked hard enough.

I hope that helps!

1 Reply

Ryan OgilviePro Member

OP

Woodstown, NJ · Member since 2015 · 21 posts · 1 vote

11y

Thank you for the feedback!

@Denise Stanford It sounds like you are doing what I am looking to do and appreciate all the information. I will continue to do some research and hopefully get a better idea of what the value of this home should be.

Thanks again!

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Questions about a Duplex deal...living in one side

Questions about a Duplex deal...living in one side

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