Deal Analysis: Duplex vs. SFH

16 Replies

HI BP Community,

How difference is analyzing Duplexes or even Triplexes from SFH? In my mind, maintenance and capex may be higher given the size of the building and the possible higher turnover, hence these two assumptions should be increased. Is there anything else I am forgetting or missing? I am curious to understand how other investors analyze multi-family deals.

Look forward to other thoughts and ideas. 

Bastian

@Bastian Kneuse

capex and maintenance should actually be lower... per unit. This is part of why MF property is so desirable. Turnover is going to affected by location, rental market, and how many bedrooms, etc.

Not only look at the numbers but also match the best possible property type with your objective.  Let me start by saying  I have an EXTREME BIAS towards duplexes.    I am looking to maximize positive cash flow but,  minimizing property management headaches, while maintaining a low overhead.  

Translated: Better cash flow than a SFH, easier to rent in a real estate downturn, better tenant quality than a 4 plex and appreciation is viewed as icing on the cake as I don't plan on selling in the short term. I am a buy and hold kind of guy and I do my own property management. I consider myself a tortoise in the race. I began in 2003 and own 19 units and I have never sold one yet. So, although my properties have appreciated nicely, I have yet to reap the benefits of appreciation. I have since retired and my properties provide a nice cash flow retirement.

Realistically, if you spend 250k or either a duplex vs SFH, your combined rents on the duplex will be better. However, if your collecting 2k in rent for each property, it is easier to find two 1k renters than one 2k renter. 1 roof for 2 units, 1 insurance policy for 2 units. An economic downturn will have a more negative effect on a SFH than a duplex.

Bottom line, look for the type of property that best meets your needs at your location.  Duplex investing in Texas is probably a lot different than trying it in California or New York.  Cheers.

@Geordy Rostad

I am trying to wrap my head around the lower maintenance and capex expenses. Let's say i purchase a duplex and a SFH in the same market. For arugment sake I assume each cost $200k. Why would my maintenance and capex expense be lower for the duplex? I would expect the opposite. I know that you mentioned "per unit" but what about in totality?

@Joe Scaparra

This is great insight. Thank you. Couple questions:

- Tentant quality may be better for a duplex over a 4-plex, what about SFH vs. duplex? Lets say there is a SFH and a duplex both in the same B- neighborhood. Are the tentants in the SFH and the duplex the same quality renters? Or are there differences?

- What are some of the underlying differences when holding a SFH or duplex as an investment? Except of having 1vs 2 tentant, more stability as there is lower chance that both units are vacant at the same time, etc.

@Bastian Kneuse

The maintenance on the duplex would be slightly higher than the SFR but the income potential should substantially offset the increase.

If your maintenance was $5k/yr on the house, maybe it would be $8k/yr on the duplex. As I mentioned though, it's better to look at the income and expenses on a per-unit basis when you're trying to compare SFR to MFR.

@Bastian Kneuse Good questions about tenant quality. Yes as a general rule SFH tenants are usually more stable and better than the average duplex tenant. However, if you keep you duplex updated and in good repair, you can attract very good quality tenants on par with SFH.

The two biggest advantages of a duplex over a SFH is the better cash flow, not only when both are fully rented but also when you have one vs none possessing your property. The second and most undervalued aspect is easier to rent a lower cost unit over a higher cost unit. A duplex that rents for $2000 will be easier to keep rented with a lower vacancy rate than a SFH renting for $2000. This becomes extremely important when you experience an economic recession in your location. Rents at $1500 and above will face more pressure to lower in a recession than rents at $1000 and below. In fact rents at $1000 or below may go up during a recession as the rental pool will increase causing rents at those levels to stabilize or go up.

@Gordon Meadows , logically you might assume that a SFH has lower maintenance cost and you might be right. However, per unit of cash flow maybe not. Case in point, one roof on each property but per unit of cash flow the duplex roof will usually be cheaper. Every now and then you're going to have tenants who trash your unit. Since a SFH is larger you could experience more maintenance cost to get it back up since you might have more repairs to accomplish. Remember per unit of cash flow you still have income coming in on one side of the duplex when the other side is vacant being repaired.

@Geordy Rostad

This makes totally sense to me know. What assumptions do you generally use when estimating maintenance on duplexes? i know it depends on a lot of factors, but it have seen investors use 10% of monthly rent for older homes and 5% for newer homes. Does that sound about right..ball park?

@Bastian Kneuse

For estimating expenses to determine if something is worth offering on, 5-10% is fine. After you make an offer, you should get access to all of the account ledgers and then you'll be able to see the exact amount the owner has been spending on upkeep. You'll know by the inspection whether or not it was enough.

@Joe Scaparra

I never thought about the attractiveness and stability of the lower rents for duplexes during economic downturns. But that makes complete sense. 

I understand that maintenance cost per unit is lower (one roof, 2 units), however why are you looking at it on a per unit basis? Isn't the total maintenance cost relevant when analyzing duplexes? Sorry

@Bastian Kneuse yes total maintenance cost has to be considered with a duplex or a SFH. Because you will have more kitchens and bathrooms with a duplex vs SFH you should experience increase maintenance cost. Yet when I invest in my duplexes I bulletproof them by replacing carpet with vinyl or tile, replace appliances with used appliances off craigslist. My biggest maintenance challenge in Texas is keeping the AC running. That is one area where I will concede that two AC systems will be more expensive to maintain than one regardless of the size of the unit. However, my maintenance cost are somewhat offset on turnover of tenants as my duplex is still producing income on the turnover of a tenant, a SFH not so much. You should expect downtime between tenants longer with a SFH vs a duplex.

Now all this being said, actual maintenance is of little concern when I consider buying a duplex.  What is driving my decision is the anticipated profit using a 5% projection for maintenance regardless of property type.  Since I manage my own properties I feel like I can minimize my cost.  For example, my vacancy rate is probably more like 2-3% per year.  I try and have zero days between tenants.  Demand for low-end properties (1200 and below) is very high in Texas.  My maintenance cost is very low compared to my peers because I usually hire handymen vs specific trade guys.  Full-time apartment maintenance guys know just about everything and are getting paid by the hour at the apartment.  Get to know them and they would happily change out a water heater for $200 bucks or fix a water leak for $30 bucks or patch sheetrock for $30.  So yeah the more you manage FOR YOUR SELF the more efficient you become.

@Geordy Rostad

Thats great advice. Are they obligated to provide the records after being under contract or can they deny my request?

How do you go about inspecting the units when there are tenants in place when purchasing a duplex? From what i understand, an inspection is possible with 48 hr notice, however the inspection will not provide a good understanding of the condition of the carpet, kitchen, bathroom, etc. in the units. Is there any advice or trick to get better insights into the actual units prior to purchasing? 

@Bastian Kneuse

You will want to write right into the contract that you expect to be provided all of the financial details. It should be in the standard boilerplate of any suitable contract.

If you can, you will want to be present at the inspection. If you are out of state, you'll have to rely on someone to take lots of pictures and videos for you. Either way, that is your opportunity to answer all of your questions about the physical state of the property itself.

@Geordy Rostad

If i am out of state, would a realtor help with taking pics? Or is that something the PM can assist with?

@Bastian Kneuse

If I was your realtor, I’d take as many pictures as you possibly wanted to make the sale. 😀

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