Should I keep my duplex?

Question

Folks,

I own a duplex in the US and I just moved out of it to Toronto for a 10 month work assignment. I'd like to keep my duplex as an investment property and stay up here for the time being, but I'm having a hard time figuring out if the duplex is really worth it. I spent so much of time and money fixing it up that it might cloud my judgement. I'd really appreciate some level-headed advice!

Currently, the building's mortgage, taxes, and insurance run $1350/month. The building is generating a total of $2220/month, after deducting the fees of a good management company. I think I'm charging a bit less than I could rent-wise. General maintenance ought to run me about $2500/year, which is more than 1% of the building's value, but I figure it was built in 1900 and I ought to be be conservative about that.

Here's the problem: the building really needs an expensive new roof. Like, this year. The middle estimate came in at $17,000. For lots on convoluted reasons, I presently have no cash for this necessary repair. My LTV is about 80%, so I don't think I can use the building as collateral on a loan, especially now that I don't live there and can't get a home equity loan (according to my bank - I didn't expect that problem). I have no obvious source of equity. I do have excellent credit, at least.

So I could get the money for a roof, but it would be a real stretch. I'd have to borrow it as an unsecured loan at a very high rate, take it from my 401(k), or otherwise really stretch to make it work. But I could do it.

Question: would YOU stretch to make it work? At first glance, it seems like it makes a nice cash flow. My mortgage rate is really cheap. But I don't really know.

Thanks for any advice y'all pros might have.

~JP

Nicole A. · Answer

• If you wanted to take from your 401K, you could borrow from it rather than withdraw. This would also avoid the 10% penalty. And you're paying yourself back plus the interest.
• Since your credit is good, do you get 0% offers? Could use that and pay it off aggressively.
• Can you negotiate a payment plan with a roofer?

JP F. · Answer

Yes, it really is a shame I didn't get a home equity loan before moving! Working with my bank has been a complete nightmare - they took three months to process my loan assumption (long story) and ignored countless emails and voice mails until I lawyered up and threatened to sue them. Once I threatened legal action, they processed the assumption in one afternoon, but by then I had moved to Canada and it was too late. I had plenty of funds saved up for the roof, but I had to use those funds to pay off the second mortgage on the building since that loan was not assume-able. If I didn't get the other borrower off the second mortgage, I'd have been forced to sell the house, anyway. So I paid off the second mortgage and planned to assume the first and then replace the second with a new loan in my name only - it would have been perfect if my bank hadn't been so awful.

Anyway, I appreciate the suggestion of a 401(k) loan. That's a great idea. Using the ROI math suggested by Fay, I stand to see a net gain on a sale of the building (after 6% realtor fees) of $17,000 (coincidentally), so it looks like I could forego that profit and toss in another $17,000 for the roof to begin to yield positive cash flow of $7,930 per year. That works out to an ROI of 23%, which is awfully good. The borrowing is not free, but it's less than the $260/month I'm gaining in equity.

So it sure sounds like I better do what I can to keep the building.

Thanks for the help!

Colleen F. · Answer

Ok it is a roof and if you sell it someone is going to make an offer that includes a concession for the roof.  Looking at the sale price you have to consider that and also the cost of the sale in commissions and fees.  I see about 8000 net from the rental based on your figures and then you need to subtract the capital expense for the roof.  Your roof will take a little over two years to pay for off of this rental income alone without any bumps. If you get a little higher rent for the owners unit you could be better off. if there are issues could be more difficult.

If you have the possibility of a 401k loan that may be the solution if you have enough value there. Interest is low.   It is a shame you did not get a home equity line before moving. Only you can decide if a 2-3 year stretch is worth the investment but it sounds like decent cash flow.   It is always hard to spend on things like a roof when you see no added value.

Russ Draper · Answer

Yes, your original investment!  You have 2 basic options:

1) Spend more $, to get ROI1%

2) Sell and buy another building, to get ROI2%

If ROI2% is considerably higher than ROI1% (it probably is), then you should sell and buy a different property.  Check whats for sale here on BP, there are some good deals.

JP F. · Answer

Russ,

Thanks! The thing is, aren't those other costs sunk at this point? I already poured the money and time into it and I can't get those back, so I'm only really looking at going forward. So I was thinking "how much would I have to invest to keep the house at this point? How much do I reasonably expect to gain if I invest?" That's the logic that underpins the ROI numbers I considered after considering Fay's input. I'd have to forego $17k profit from selling the place (so that's effectively a cost) and I'd have to toss in $17k more to replace the beat-up roof. What I stand to gain is about $8k per year. That ignores the cost of borrowing the $17k, but I believe the continually-building equity (about $3000/year at this point in the mortgage) ought to counterbalance that.

Do you think I'm missing any important pieces?

Russ Draper · Answer

We need to know what you paid for it, how much % you put down at closing, etc before we can make a suggestion.  The ROI is based on that, not just the cost of the new roof!

It doesn't matter how much you have into it, it only matters what you can get out of it.  Don't be emotional, its just a building.

Fay Chen · Answer

For example, I own a rental property and wants to know if I should keep it or sell it.

• Purchase price: $375K; Loan: $300K
• Initial Investment: $100K (down payment, closing & rehab)
• Free Cash Flow: $1300/month (rent minus all expenses)
• Return on Investment = 1300*12/100K = 15.6%

What if I can sell the house for $450K in today's market?

• Sale price: $450K
• Expected proceeds: $113.5K (after paying closing, commission and loan)
• Return on Expected Proceeds = 1300*12/113.5K = 13.7%

So if I can find another investment that can give me a return higher than 13.7% and less headache, I'll sell the house and re-invest in the money. If not, I'll keep it as a rental.

JP F. · Answer

I'm not sure how I could split it up - there's one garage, one shared basement, and a shared back entry. One unit is certainly nice enough to be owner-occupied, but the other has been a renal unit for some time now and would need some investment to make it attractive to an owner, I think.

I'm not sure what you mean about estimated ROI in this context. I guess the way I look at it, I could make an investment of $17,000 to get about $5000/year plus accumulated equity, or I could sell the building and clear perhaps $20,000 before taxes.

Judy Parker · Answer

Going forward, you need to keep a Reserve Account of spare funds, for situations such as this.  I think you should somehow find the funds to repair the roof (can you pay the roofer in monthly installments)?

Fay Chen · Answer

Can you split it and sell it as 2 half-duplex? Depending on where it is, you may get a nice return from the appreciation. Instead of looking at how much you need to pay, what's your rate of return? $400/month may seem small, but $400/month COC on $30K investment is good enough for me. If you don't like the numbers, sell it. What's your estimated return on investment then? Is it higher than keeping it as a rental?

Should I keep my duplex?

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