Duplex in LA - does the math look right?

Question

Hi all - welcome your advice
I'm a first time homebuyer with a husband and 2 young kids.  We've been looking to find a duplex with two homes on a lot, and the environment is very competitive at this moment: at lower price points (625K max) only considering very nice streets in Hollywood/Northeast Los Angeles, with at least 1400sf for the owner unit and a decent lot (5000sf+).  After losing a number of properties to all cash investors, we've gotten an offer accepted on a duplex- here's the stats

$615,000 (7,500 sf lot) 995sf front house, 2b/1ba, totally clean, enormous private deck with great views, rent could be 1800-2100

1500sf back house, also totally clean, 3bd/2ba, which was recently rented out as two separate units & converted back for sale, so the layout is as awkward as you'd expect two apartments fused together would be... but we think we could reconfigure and make it groovy.  Rent could be 2100-2400.

We don't have 20% down to qualify for conventional, so we're looking at FHA with 5% down; Monthly payment will be about $4,200.

So, if our circumstances changed dramatically (we don't anticipate this,) we'd be able to basically cover the payment with the rents, though it wouldn't be positive cash flow right away.

Does this sound like a smart way into the market?
Our ultimate goal is to live in a normal house, and keep this as investment property indefinitely.

Arthur Garcia · Answer

Mel,

I wouldn't do this deal.

I think the problem, at least for me, is that you are trying to kill two birds with one stone (buying a home and buying a rental).

Normally this wouldn't be a problem - in a more reasonably-priced market where the median house price is 150K, however this is NOT the case LA.

I think the better way to go is to buy a house (FHA 3.5%) you are happy with maybe a 3/2, it will likely be less than the dublex.  Then buy a rental - NOT in LA via Homepath (10% down) in a market that makes sense.

Or...

Rent a house in a great school district and buy a rental via homepath or a conventional loan in a market where you can get a house for a better price point.  (BTW - this is what I am doing)

Or. . .

Move to the Valley and find a duplex where the numbers make a little more sense, or buy a house in a good area in Valley and buy a rental in the inland empire.

Please don't take my advice negatively, I think you have a good idea and it would work in most markets, but I just don't think it make sense with the numbers you have.

AG

Account Closed · Answer

Mel:  a $615K house with 5% down and $4K in rents will never cash flow.  If you like the 3/2 house enough to live in it for the long haul, then consider the additional unit something to offset your monthly housing costs.  Remember that your taxes will be based on the $615K purchase price.  If you rent the 2/1 for $2K, your taxes will eat up more than 3 months in rent each and every year.  Then there's trash and water that you'll be paying for both units.  That doesn't take into account any vacancies or repairs.  Also, the city of LA (and many surrounding areas) is rent controlled.  If the prop is considered a duplex by the rental board (doesn't always matter about zoning), it may fall under rent control.  Tread carefully and do your own diligence on this one.

Don't buy it unless you love the idea of living in and fixing up the 3/2, can afford the PITI, and have cash reserves for when the rental doesn't provide enough income.

Jake Kucheck · Answer

I'll pile on with the same sentiment... the objectives you consider for satisfying your requirements for a personal residence will typically be wildly different than the ones you consider for an investment property.  The only instance in which I suggest a live and rent like the one you are proposing is when the unit you're living in is FAR below what you woud actually want to live in long term.

Mel Jones · Answer

Actually it's true - it may not be technically a duplex... it's zoned R1 but approved for use by the city as 2 units.  Remains to be seen if our financing will actually work out - we're only approved for the high purchase price if it's legal income property.  Our agent says it's extraordinary that the sellers accepted our offer given it's FHA, but they have put a lot of sweat equity into the home and wanted to sell it to someone who they liked.

Jeff S. · Answer

It doesn't really seem like a duplex but 2 houses on one lot. Sometimes these types of configurations don't bring as much value as you might think. I'd be very careful. If you buy FHA you should have a pretty reliable appraisal so may be protected.

If it were me I'd pull the sales history on these places and see how the values fared with the general market over time.

If this is a typical type of thing for this area then that is a good thing. If it is an oddity then maybe not so great. Be careful, good luck.

OTOH guest houses are, IMO, cool so...

Uwe S. · Answer

Hello Mel and welcome to BP world.

With the rent payment alone you cannot finance this duplex at this high end price, there some utilitie cost, maintenance, lawn care and so on. I don't see a smart way into the market with this propertie for you only the begin of an infernal trip.
There should be some better (payable) properties even in your area I guess.

-Uwe

Bill Gulley · Answer

Many will say it's a poor investment due to cash flow, but this is to be your home, so it makes perfect sence to me as it seems you'rein a tough market anyway....and I'm not familiar with the market there....but

As your own home you would have maintenance too and if it's a good location in good condition why not live there and seek appreciation in later years?

As to keeping forever, you might, then again investors should not fall in love with any property. Markets may change, maintenance may be an issue, regulations change and other factors come into play so you should always have an exit strategy, IMO.

Good luck...

Duplex in LA - does the math look right?

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