First Duplex Decision (Need Opinions)

[Kyle Brown]

Hello,

I am close to purchasing my first duplex in South Jersey and am looking to see if anyone is or has been in the same situation.  It is a 2 unit 1 bedroom 1 bath each.  Unit 1 currently rents for $700/month, Unit 2 currently rents for $725/month.  There are minor repairs and definitely updates I would like to do, but no major issues. 

I will be purchasing this with FHA 3.5% down at about a 4% interest rate. It is listed at $132,900, but I will be making an offer around $107,000. The total monthly mortgage for the property including taxes and homeowners insurance is $1103.04/month. If my offer does get accepted, I will only be getting income from the one Unit 1 $700 for the first year, which will cause me to have a negative cash flow. I will be paying the balance which would be $403/month. Once the second year comes and I can rent out the second unit, I will be cash flow positive with $321.96/month.

I would most likely raise rent to $800 and $850 once all tenant contracts are up, but to be conservative, I used the current numbers.  My question is, is it worth it to suck up the negative cash flow for a year and have to put out the extra money to pay the mortgage for a long term positive cash flow duplex?  

[James Masotti]

@Kyle Brown - When house hacking you need to stop looking at it from the perspective of negative cash flow and look at it from the perspective that you're only paying $403 a month for your housing expenses. I'm in a South Jersey townhouse and my cost of PITI is almost $1450...I'd love to have that extra $1000 in my pocket for REI every month!

Yes once you move out and get another tenant in the there you'll be cash flowing $321 a month but, you'll also have to live some where else...and if that place ends up costing you more than $724 then you're actually loosing money by moving out of the duplex...just something to think about. 

[Arpan Patel]

I don't think the math actually works because there is still maintenance, vacancy, and capex that is missing and I'd still add in some property management fee even if you are to manage it at first. This deal doesn't look like it would work because capex might eat away a lot more then you originally intended especially when it sounds like you are not doing any renovations because it is already rented. I would be cautious about this deal. Doesn't seem like there is much space for things to go wrong. Brandon Turner wrote an interesting article on capex and how to estimate its costs - I think last year. Good Luck!!

[Jessie Tetreault]

These numbers don't seem right to me. It seems to tight. IF you got the property for $107,000 you said mortgage, taxes, insurance would be $1103.04. I don't think that you are factoring in any maintenance, vacancy, cap ex or property management expenses. Even if you plan on managing the property yourself you should still account for property management. Also something to consider with the insurance, while occupying the residence you will have a home owners insurance policy, when you move out and have it as a full time rental you will need to switch this into a landlord insurance policy which could end up costing you more money and with these numbers in just doesn't seem there is enough room even with the rents raised up to $850/ side. I hope this helps.

[Scott Weaner]

Analyze the property as if you were renting both units. Factor in all expenses and see what the cash-flow would be.

[Kyle Brown]

Ok great, thanks for the feedback, I will update my numbers and repost to see if they make better sense then.  

[Michael Rutkowski]

Too tight, is a rent increase of 15% possible in your neighborhood? Numbers that tight demand scrutiny, and constant re-running. As others have said, what about maintenance? I budget 10% depreciation, but I'm also in a different situation than you are... 

[Kyle Brown]

Michael Rutkowski Yea that is why I am a little hesitant in pulling through with the deal. I could even try to offer lower than $107k but I would assume there would be slim chances it's gets accepted. Not much else is in my control.

$900 in rent per unit would be pushing the limits in this area especially for 1 bd 1 bath units.

Regardless, my first year will cost me the balance every month.

[Michael Rutkowski]

How much real value would be gained from sweat equity or from appreciation in your market over 5 years? Does your market allow STR's? Zoning can even help. Think outside the box when things are tight like this, have a plan A,B, and C.

My first property was a duplex, which I gutted and redid, collecting rents all the way, even when there was no kitchen. It's totally possible, but is it worth it? I couldn't do it ever again. My back is broken after a few of those. Hiring someone would be out of the question when it's tight like that.

Good luck! I've been there...