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Updated over 7 years ago on . Most recent reply

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Mark Gawlik
  • San Diego , CA
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Duplex dilemma please help

Mark Gawlik
  • San Diego , CA
Posted
Hi everyone, I'm in a dilemma with my first duplex and I can really use some input. I purchased my first duplex four years ago, in an up and coming neirgborhood really close to downtown. It sits on 7000 sqft lot. The house was built in 1903 so it's a unique looking property. The city would not let me build additional units cause there is new 5000 sqft per unit law in place. But I can build a garage with an office on top. I'm contemplating eventually turning the duplex into a single family home and moving in, since I currently rent a small apartment. I have over $300K in equity and I'm calculating $180k to complete my build. My realtor hates the idea and is telling me to sell so I don't pay capital gains tax and try to invest the money in more units. But the market is out of control in San Diego. Thank you for taking the time to read my story.

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Dan H.
  • Investor
  • Poway, CA
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Dan H.
  • Investor
  • Poway, CA
Replied

First thing I notice is the realtor’s suggestion results in RE comision. 

Are you thinking of ripping out a kitchen when you go to SFR. Investors seldom want to go from permitted multi unit (duplex) to SFR because the cash flow on the duplex is typically much better than on the same size SFR. So I am not a fan on converting the RE to a SFR.

I also question the return on adding a garage and office.  My threshold for such expenditures is that I want an immediate 50% return on the investment.  This is because these efforts are both work and have risks.  I question if this expenditure would recoup the cost much less net 50% profit.  

So ...

If you like the area and desire a larger SFR than either unit of the duplex I would consider renting an SFR where you want to live (possibly near the duplex). Note SFRs purchased today, in general, have negative cash flow. They are appreciation plays. Your duplex possibly would cash flow if purchased today (the ones I purchase today in San Diego county cash flow) and should appreciate similar to SFRs.

I would recommend leveraging your equity in some way even if it is to pull it out to to place in RE, stocks, bonds, REIA, notes. Note if your REI is worth $600k and you have $300k equity and it appreciates 25% you have made 50% on that appreciation However if you have $150k equity you have made 100% on that appreciation (in both cases $150k appreciation). The other $150k should also be making you money via how it is invested.

In summary I am not a fan of either suggestion but I am a fan of you leveraging you equity for further return.   I think there are better options available than either suggestion.

Good luck

  • Dan H.
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