Rents Only Cover Mortgage

Member since 2017 · 23 posts · 12 votes

Hello bigger pockets community. After months of searching for a Duplex, I've finally found one. I plan on living in one unit and renting out the other eventually moving out and renting both units. Total income from both units is $2,700 but the mortgage is $2,600. I have about $10K in reserves. I am anticipating it to take a few years before the property will be able to cover (vacancy reserves, repairs, cap ex, property management etc). I'm anticipating 10 years before it will cash flow. This will be my first investment property. I plan on purchasing more in the years to come that have more favorable margins. What are you alls thoughts for a first time property?

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Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

The members here probably own 10’s of thousands of properties. How many of those properties do you think they wish they hadn't bought? 5? 50? On the other hand I bet there are 1000’s if not 10’s of thousands they wish they had bought but didn’t think he were “good enough” deals at that time.

I assume you’re paying rent now and have no tax write offs. Add those benefits. If this property only appreciates 5% per year you’ll make somewhere between 25% (20% down) and 100% (5% down) annually.

Imagine you plan to hold this property for 20-30 years. The returns for the first year just don’t matter, even the first 5 years don’t really matter. Run the numbers 5 years from now after you’ve moved out. Calculate the increased rents providing more and more cashflow, decreased loan balances leading to more and more principle paydown. Don’t forget all this money will be tax free after depreciation, heck you’ll probably be carrying forward losses as you profit. If the property is currently fully rented you may get a lower property tax bill as an owner occupant. Sometime in the next 5 years interest rates will probably be lower than today making lower payments all but inevitable with the lower balance.

There are markets where you need cashflow, markets where the properties will never appreciate and may actually depreciate. That’s why they cashflow, because nobody will pay more. It’s just a different type of investing where you may suffer from inflation (higher repair costs) while not benefitting as much as prices have caps.

You forgot to put your location in your profile so we don’t know what your market is like. If your reply is that you’re in San Francisco or NYC, suddenly everyone will say yes, obviously this is a good deal. If you say something like northern MN, Ohio, or a small town in the Great Plains, I would join those saying no.

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Drew SygitBusiness Member
Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
4y
Why buy it?
The market is resetting and many investors that bought based upon appreciation may be in for a rude awakening.
[email protected]248-209-6824
Logical Property Management4.9451 Reviews
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6 Reply
Stefan Gray
OP
Member since 2017 · 23 posts · 12 votes
4y
Quote from @Drew Sygit:

Why buy it?
The market is resetting and many investors that bought based upon appreciation may be in for a rude awakening.
I'm thinking of buying a property that atleast covers operating costs. I'm working with a small down payment. It's either that or save up a little more.
0 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
4y
Don't waste your time on a non cash flowing property. Not for your first one anyway. After you have a few, maybe take a chance on one that you are sure will appreciate A LOT.
You have zero to gain with this property, and a lot to lose. You can do better. Pass.
9 Reply
Preston Hillard
Real Estate Agent · Dayton, OH · Member since 2021 · 10 posts · 4 votes
4y
Ive gotta agree, good to be able to look things over a longer time frame but this has got to be a pass for me, if its not cash flowing right now even with you renting out both I would keep looking. I know its a hassle I am looking to a 2-4 unit for myself aswell... keep searching and keep the faith, Best of luck to you!
2 Reply
Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
4y
How much are you putting down? My guess is 5% which is why it won't cash flow. Remember when most investors run numbers for cash flow, they have 20% down so their payments are lower.
9 Reply
Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
4y
The members here probably own 10’s of thousands of properties. How many of those properties do you think they wish they hadn't bought? 5? 50? On the other hand I bet there are 1000’s if not 10’s of thousands they wish they had bought but didn’t think he were “good enough” deals at that time.
I assume you’re paying rent now and have no tax write offs. Add those benefits. If this property only appreciates 5% per year you’ll make somewhere between 25% (20% down) and 100% (5% down) annually.
Imagine you plan to hold this property for 20-30 years. The returns for the first year just don’t matter, even the first 5 years don’t really matter. Run the numbers 5 years from now after you’ve moved out. Calculate the increased rents providing more and more cashflow, decreased loan balances leading to more and more principle paydown. Don’t forget all this money will be tax free after depreciation, heck you’ll probably be carrying forward losses as you profit. If the property is currently fully rented you may get a lower property tax bill as an owner occupant. Sometime in the next 5 years interest rates will probably be lower than today making lower payments all but inevitable with the lower balance.
There are markets where you need cashflow, markets where the properties will never appreciate and may actually depreciate. That’s why they cashflow, because nobody will pay more. It’s just a different type of investing where you may suffer from inflation (higher repair costs) while not benefitting as much as prices have caps.
You forgot to put your location in your profile so we don’t know what your market is like. If your reply is that you’re in San Francisco or NYC, suddenly everyone will say yes, obviously this is a good deal. If you say something like northern MN, Ohio, or a small town in the Great Plains, I would join those saying no.
17 Reply
Drew SygitBusiness Member
Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
4y
@Stefan Gray If you buy this one, how will you buy the next one?
Waiting and saving up more money? How long will that take?
Focus on finding better deals!
Are you thinking of living in one of the units? If so, look into an FHA 203k loan and buy an ugly 2-4 family that you'll have les competition to buy, which means lower price and better deal.
[email protected]248-209-6824
Logical Property Management4.9451 Reviews
Website View Page
3 Reply
Steven Foster Wilson
Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes
4y
Quote from @Stefan Gray:

Hello bigger pockets community. After months of searching for a Duplex, I've finally found one. I plan on living in one unit and renting out the other eventually moving out and renting both units. Total income from both units is $2,700 but the mortgage is $2,600. I have about $10K in reserves. I am anticipating it to take a few years before the property will be able to cover (vacancy reserves, repairs, cap ex, property management etc). I'm anticipating 10 years before it will cash flow. This will be my first investment property. I plan on purchasing more in the years to come that have more favorable margins. What are you alls thoughts for a first time property?
Honestly, the cashflow is not sounding the best on this but would you be open to also renting out rooms on your side? That could bring you more $$$. On my most recent BRRRR here in Columbus is a duplex my mortgage is $1,824, we rented out the other side for $2,350 then I decided to rent out rooms in my side to a friend for $450 so I am not making a ton although I am happy with it. When I move out it will be even more, +this property has appreciated tremendously.

I always say the only thing I regret is not buying a property or trying to make it work.
2 Reply
Nicolas Decollibus
Member since 2021 · 5 posts · 7 votes
4y
Quote from @Bill B.:

The members here probably own 10’s of thousands of properties. How many of those properties do you think they wish they hadn't bought? 5? 50? On the other hand I bet there are 1000’s if not 10’s of thousands they wish they had bought but didn’t think he were “good enough” deals at that time.
I assume you’re paying rent now and have no tax write offs. Add those benefits. If this property only appreciates 5% per year you’ll make somewhere between 25% (20% down) and 100% (5% down) annually.
Imagine you plan to hold this property for 20-30 years. The returns for the first year just don’t matter, even the first 5 years don’t really matter. Run the numbers 5 years from now after you’ve moved out. Calculate the increased rents providing more and more cashflow, decreased loan balances leading to more and more principle paydown. Don’t forget all this money will be tax free after depreciation, heck you’ll probably be carrying forward losses as you profit. If the property is currently fully rented you may get a lower property tax bill as an owner occupant. Sometime in the next 5 years interest rates will probably be lower than today making lower payments all but inevitable with the lower balance.
There are markets where you need cashflow, markets where the properties will never appreciate and may actually depreciate. That’s why they cashflow, because nobody will pay more. It’s just a different type of investing where you may suffer from inflation (higher repair costs) while not benefitting as much as prices have caps.
You forgot to put your location in your profile so we don’t know what your market is like. If your reply is that you’re in San Francisco or NYC, suddenly everyone will say yes, obviously this is a good deal. If you say something like northern MN, Ohio, or a small town in the Great Plains, I would join those saying no.

Really good read! Can't wait to see what this cycle brings.
2 Reply
Mose Gebremeskel
Investor · Member since 2022 · 233 posts · 142 votes
4y
Really interesting hearing all these responses. I would say depending on location and how long you plan to hold this property will make the answer easier.
2 Reply
Patrick DruryBusiness Member
Real Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes
4y
@Stefan Gray
Is it an A location?
[email protected]614-412-4565
Reafco-555 Reviews
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0 Reply
Stefan Gray
OP
Member since 2017 · 23 posts · 12 votes
4y
Quote from @Bruce Woodruff:

Don't waste your time on a non cash flowing property. Not for your first one anyway. After you have a few, maybe take a chance on one that you are sure will appreciate A LOT.
You have zero to gain with this property, and a lot to lose. You can do better. Pass.

Thanks for your input!
0 Reply
Stefan Gray
OP
Member since 2017 · 23 posts · 12 votes
4y
Quote from @Preston Hillard:

Ive gotta agree, good to be able to look things over a longer time frame but this has got to be a pass for me, if its not cash flowing right now even with you renting out both I would keep looking. I know its a hassle I am looking to a 2-4 unit for myself aswell... keep searching and keep the faith, Best of luck to you!

Thanks for your input still evaluating my strategy to get better clarity around what I want.
0 Reply
Stefan Gray
OP
Member since 2017 · 23 posts · 12 votes
4y
Quote from @Theresa Harris:

How much are you putting down? My guess is 5% which is why it won't cash flow. Remember when most investors run numbers for cash flow, they have 20% down so their payments are lower.

Very true. I've got evaluate my goals and be realistic hard to find cashflowing properties with low down payments.
2 Reply
Stefan Gray
OP
Member since 2017 · 23 posts · 12 votes
4y
Quote from @Bill B.:

The members here probably own 10’s of thousands of properties. How many of those properties do you think they wish they hadn't bought? 5? 50? On the other hand I bet there are 1000’s if not 10’s of thousands they wish they had bought but didn’t think he were “good enough” deals at that time.
I assume you’re paying rent now and have no tax write offs. Add those benefits. If this property only appreciates 5% per year you’ll make somewhere between 25% (20% down) and 100% (5% down) annually.
Imagine you plan to hold this property for 20-30 years. The returns for the first year just don’t matter, even the first 5 years don’t really matter. Run the numbers 5 years from now after you’ve moved out. Calculate the increased rents providing more and more cashflow, decreased loan balances leading to more and more principle paydown. Don’t forget all this money will be tax free after depreciation, heck you’ll probably be carrying forward losses as you profit. If the property is currently fully rented you may get a lower property tax bill as an owner occupant. Sometime in the next 5 years interest rates will probably be lower than today making lower payments all but inevitable with the lower balance.
There are markets where you need cashflow, markets where the properties will never appreciate and may actually depreciate. That’s why they cashflow, because nobody will pay more. It’s just a different type of investing where you may suffer from inflation (higher repair costs) while not benefitting as much as prices have caps.
You forgot to put your location in your profile so we don’t know what your market is like. If your reply is that you’re in San Francisco or NYC, suddenly everyone will say yes, obviously this is a good deal. If you say something like northern MN, Ohio, or a small town in the Great Plains, I would join those saying no.

Such an interesting perspective. The taxes for my area New Albany allow for a homestead exemption (Cutting taxes in half!) So long as I plan on living there for the next 5 years it may be enough to see some kind of return. So many angles to look at this situation.. thank you!
1 Reply
Stefan Gray
OP
Member since 2017 · 23 posts · 12 votes
4y
Quote from @Drew Sygit:

@Stefan Gray If you buy this one, how will you buy the next one?
Waiting and saving up more money? How long will that take?
Focus on finding better deals!
Are you thinking of living in one of the units? If so, look into an FHA 203k loan and buy an ugly 2-4 family that you'll have les competition to buy, which means lower price and better deal.

I'd save up for the next one or figure out a way to partner with someone else on my next deal. Thanks for your advice! Very solid.
0 Reply
Stefan Gray
OP
Member since 2017 · 23 posts · 12 votes
4y
Quote from @Steven Foster Wilson:

Quote from @Stefan Gray:

Hello bigger pockets community. After months of searching for a Duplex, I've finally found one. I plan on living in one unit and renting out the other eventually moving out and renting both units. Total income from both units is $2,700 but the mortgage is $2,600. I have about $10K in reserves. I am anticipating it to take a few years before the property will be able to cover (vacancy reserves, repairs, cap ex, property management etc). I'm anticipating 10 years before it will cash flow. This will be my first investment property. I plan on purchasing more in the years to come that have more favorable margins. What are you alls thoughts for a first time property?
Honestly, the cashflow is not sounding the best on this but would you be open to also renting out rooms on your side? That could bring you more $$$. On my most recent BRRRR here in Columbus is a duplex my mortgage is $1,824, we rented out the other side for $2,350 then I decided to rent out rooms in my side to a friend for $450 so I am not making a ton although I am happy with it. When I move out it will be even more, +this property has appreciated tremendously.

I always say the only thing I regret is not buying a property or trying to make it work.
Wow so one side covers the mortgage and then some.. that's awesome. How much cash did you put down on your hard money loan? Did you anticipate the returns to be as good as they were going into it?
0 Reply
Stefan Gray
OP
Member since 2017 · 23 posts · 12 votes
4y
Quote from @Patrick Drury:

@Stefan Gray
Is it an A location?
I'd say it's a B location
0 Reply
Nicholas L.Pro Member
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
4y
@Stefan Gray
post more details
how much are you putting down?
what are all the other expenses?
what are you basing projected rents on?
0 Reply
Julien J.
Investor · CO · Member since 2016 · 757 posts · 1k+ votes
4y
Depends, but I'd err on making your first move and house hacking it. I feel it's most important to take the first step and figuring things out along the way especially with long horizons.
Thats how I started with a duplex which did not cash flow and 5 years later with rehabs, marketing creativity and rent increases, I kick myself for not buying the other "bad deals" in the neighborhood. Became my best performing property cash flow wise and 2x in value.
If its in a good location, you can value add with sweat equity, and raise rents every year, go for it.
4 Reply
Michael Paling
Rental Property Investor · Gwinn, MI · Member since 2016 · 174 posts · 103 votes
4y
One thing that I wonder about with your original post is how are you running your numbers? Are you calculating them based off only having 1 unit filled since you're living in the other one? I just bought my first duplex and I'm doing the same thing, but I calculated my numbers as if I was my own renter, meaning that both units are filled. My income from the other unit will be $750/mo and that should cover or almost cover PITI. Then my "rent" to myself is responsible for maintenance, CapEx, vacancy, etc.

and if it’s not cash flowing off the get go, move on. Have patience. You’ll find a better deal.

0 Reply
Eric LarsonBusiness Member
Real Estate Broker · Wooster, OH · Member since 2016 · 14 posts · 6 votes
4y
@Stefan Gray it totally depends on what your goals are for this project and how your whole financial picture fits together outside of this project to see if this is a good idea or really not.
Since you are buying for your personal home as well as an investment you are looking at everything with a different perspective than someone would if they were looking at the pure investment potential. A good idea may be to pencil this out as if the other side of the duplex is permanently vacant and see if you can float the duplex on your own. Then bank the rents for the other side and use that capital as the financial backstop for any repairs or improvements in the short term and as the building blocks for the down payment for your next investment.
This could be a good buy, but it totally depends on how you operate it and your timeline. This plan is a slow and steady wins the race plan. Good luck!!
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2 Reply
Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
4y
@Stefan Gray here are the conditions under which I can see it possibly being a good deal:
1) you want to live there for a while and the 1300+ expenses/reserves that you would essentially be paying in your locked in "rent" allows you to live better and more securely and in a better location than you would otherwise. You essentially have a partial subsidy for a nice primary. If that is the goal and lets say owning or renting an equivalent property would cost you $3000 a month or what have you, you are doing great.
2) solid prospect of rent increase and appreciation with manageable capex. This makes your paydown another source of potential wealth. We are clearly at the top of a cycle here, so don't expect mindblowing increases...
3) can you condo these at some point? Are the utilities split and do local laws allow it? Having that kind of exit possibility could make a real difference. You could sell both, hold onto one at almost certainly cash flow positive nature.
4) good potential of income increase separate from real estate. Is this your only play? Does the $1300 subsidy for your mortgage allow you to accumulate another down payment?
1 Reply
Brian Ploszay
Member since 2021 · 15 posts · 5 votes
4y
Two unit buildings rarely cover their mortgages. Still, you should consider buying this if you plan on a long term hold. The price you paid for the building will remain fixed. Over the next 5 years, I suspect you can raise the rents somewhat. In time, the financial position of the building will improve. So many landlords started out like this: Buy a small building, live in a unit, and eventually grow.
0 Reply
Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
4y
Depending on what market you’re in you will be lucky to break even. House hacks don’t always have to cash flow. If you are even cutting your living expenses in half you’re winning
2 Reply

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