How do I earn a positive ROI on Owner-occupied duplex or triplex?

Question

I'm looking to purchase my first property with my fiancé - an Owner-occupied duplex or triplex. My primary intention is to use the rental income to lessen our cost of living, and then eventually use the BRRR strategy to fund a second investment property and so on.

When analyzing properties I am finding that the income from only one other unit (in a duplex) is not enough to cover the monthly expenses. This is not always the case when analyzing three-unit properties.

If buying a duplex, how do I determine how much we need to contribute monthly to produce a positive ROI, and set aside enough for capital expenditures? Do I set aside my "rental payment" as a forced savings account for Cap Ex?

I hope I'm explaining myself clearly. Thank you guys for your help!

-Ryan, a Newbie

Jaysen Medhurst · Answer

@Ryan Turian, best I can tell duplexes are very difficult to make work as pure investment properties for 3 main reasons:

• There are only 2 units over which to spread the fixed cost (costs the same to mow the lawn at a duplex as it does a 4-plex)
• Duplexes are the most desirable to owner-occupiers (non-investors) so they tend to go for higher per-unit prices, but that doesn't necessarily translate into higher rents.
• Zoning laws mean duplexes are more likely to be in more desirable neighborhoods, increasing sales price and making them less likely to cashflow.

For the analysis I've done, duplexes just don't make sense as a pure investment unless you get a smoking deal on the purchase price.

I think focusing on 3 or 4-plexes, combined with BRRRR is a better way to go.

With regards to your questions about CapEx, etc.: Yes, analyze the deal just like you weren't going to live there and see how the numbers work. You should factor in your "rent" at market rates to make sure it works. If both units would rent for $800/month, then you figure $19,200/ year Gross Scheduled Rent, minus CapEx, Vacancy, Repairs, Insurance, Management, Utilities, all of the expenses and see where you end up.

Ryan Turian · Answer

Thank you everyone for your VERY helpful insight and suggestions. It does make more sense to spread the costs over a greater number of units, and seems necessary considering the high purchase prices here in Connecticut.

Thank you again for your feedback and making BiggerPockets what it is! Wishing you all success!

Ryan

Alex Dem · Answer

@Jaysen Medhurst Agreed 100%. It is hard to compete with owner occupants as they don't necessarily try to cash flow positive, but to cover part of PITI expense.

@Ryan Turian another factor to think about is maintenance and management per unit is likely to be lower with 3-4 unit properties ( one roof, one foundation, one location , etc...)

Steve K. · Answer

@Ryan Turian, depending upon your market, your "house hacking" strategy can work to heavily subsidize your own cost of housing, and in an ideal case, you "live free"....allowing you to invest the rent/mortgage you would have been paying in other REI. (Yes, I like the BRRRR strategy too).

Note that on BP, some markets are getting 2% of purchase price per month in gross rents, while others are lucky to get 1%, and still more expensive (like my Denver market; many rentals on MLS only let you achieve 0.7% of purchase in monthly gross rent.)

So, that renter in a "2%" market, is likely paying in rent about 3 to 3.5 times what their mortgage payment could have been....very favorable to the landlord (you!). Here, one half of duplex might rent for enough to pay the mortgage on both halves, and allow for budgeted managment fees, maintenance, vacancy%, capital expenses, etc.....to where you live free.

In the 0.7% market, it's likely 1.4x what his mortgage would have been. So, it might take 2 or 3 renters to pay the mortgage and expenses on 3 or 4 units, to where you live free.

I'd encourage you to search on posts by @Billie Miller ; she has a blog on her successful house hacking of a Denver Duplex. (look for the link to her persona website).

And, yes, you should budget all of your expenses/capex/vacancy for your entire duplex/triplex. Set them aside in a savings/checking account; then, if the 1 or 2 tenants don't pay for the full "land lord budget", you're living heavily subsidized....but not quite "free". You can think of your ROI two ways. I'm making ROI of "X", but I'm living rent free in a $1000 half-duplex, or I'm making ROI of "Y" when I (tenant) pay myself (landlord) $1000/mo rent.

See also, this "BRRRR Success story" from CT, wherein @William Collins was using the BRRR method.

https://www.biggerpockets.com/forums/223/topics/445367-full-time-employee-multiple-brrrr-side-hustle-2875-to-goal

You might gleen some helpful comparable fix/hold numbers from his market.

Good luck.

How do I earn a positive ROI on Owner-occupied duplex or triplex?

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