What do you guys think of this deal?

[Seth B.]

Hello All,

It's been a long while since I've been on the forums, but I have finally decided to get serious with purchasing a duplex this year. My apartment lease is up in August so I have set a goal to be in a duplex by then. The idea is that my wife and I move into a duplex and rent out the other side to live in a place for less and have an investment property. While we are living on the one side, we plan on fixing it up, and then eventually moving into the other side, and to do the same thing. Eventually after a year or two we'll move into another place and keep doing that till we have several properties. 

We are currently looking in Madison, WI,  and I have found an attractive property that I am thinking about making a offer on. The house is listed at $255K, and we are thinking about making an offer at $230K. One side is currently rented out to a long term tenant that is $850 on that side. The other side (the one that we would be living on) is $1300.

So when it's all said and done. The mortgage payment would be around $1600/month, but then we would be getting the $850 (maybe more if we can raise rents?). So that would knock it down $750/month. What do you guys think? Is this an ok first place to start with? 

I know I'm a little light in the detail area when it comes to numbers. So please let me know what else you would need to further assess.

Thanks so much!

[George N.]

All depends what your goals are. Had I asked about some properties I bought a few years ago the thread would have gone a lot like this one. A tad shy of the 1% rule but a good area in a solid high growth market. People telling me it's crap. Had I listened I'd be out 300K plus. Now that doesn't mean this will always turn out to be the case, it was a unique time in history, but still.

Depending on what you want this could be fine. Lets say you live in the unit for 3-5 years, gain some management experience, and move out and turn it over for professional management. Fast forward 15 years.

Madison is a solid growing market, this a is a good neighborhood so +/-4% appreciation a year on average seems very reasonable. Lets say you've raised rents the same amount. The place is now worth something like 375K. Your rents are probably like 3700 a month (I'm doing very rough top of the head ballpark math) but your mortgage payment (at least the principle and interest) is the same. 

15 years in you owe about 115K on the place (assuming you put 20% down) so you have about 260K in equity.

Lets assume you never saw a red cent of cash flow despite the fact that your mortgage payment stayed the same while your rents increased. You're still sitting on a quarter million dollars off of a +/-50K initial investment. Find me an investment that will get you a 5x return in 15 years. This is the power of real estate investing.

Of course, you have also enjoyed the tax benefits of depreciation and learned the business a long the way. Your purchase has given you experience and credibility with lenders and others and propelled you into other investments. Your second deal was better than the first. The third better still.       

If you're looking to live off REI in the immediate future this is probably not the best way to tie up 50K. But if you have 50K, a good job, will have another in a few years, and want to do something like this 4-5 times on your way to retirement you're likely to do very, very well.

I think there is a little bit of a disconnect on this site amongst the average investor out there and the full-time cash-flow only people who are, naturally, the ones who make up the bulk of the posters.