Anyone buying duplex lots as buy and hold strategy?

[Mike H.]

Had the opportunity to pickup some duplex lots. Just agreed to terms with the bank last week. Was wondering if anybody sees this as a potential strategy for buy and hold investors.

Here's my thought process. Let me know what you think.

1) The lots were going for mid 50's at one time - maybe more in the peak.
2) Villages by me do not have a ton of duplex/4plex lots available.
3) I was able to pick them up for 22.5k per lot (4 lots) and did
it with 15% down as the bank also gave me the loan.

This was kind of unique situation since I am familiar with the bank
and wanted to keep my reserves up. I offered to put down 15% now
and another 15% in a year and they accepted.

Here is my intended strategy for these lots.
As pricing on homes continues going up, the all in returns on SFH rentals will go down. In the past 2 years, I've been getting about $400 to 500 per month profit (before vacancy and repairs) per deal. Thats with little to no money down (0 to 5k tops).

I'm seeing the numbers creeping down to the 350 to 400 mark which is still good but those deals are getting few and far between. My thoughts are that in a couple of years it will be back to roughly 200 to 250 per month range (again thats based on no money down.

So my thoughts are that in 2 to 3 years, I will build duplexes on these lots. And, while I will end up having to put up about 30k a side to do it, I should be in the 500 to 600 a month profit range with these.

And if I can get some appreciation on the lots, I'm hoping I can use some of the equity in the lot to get in a little cheaper.

My brother in law thinks he can build the duplex lots for about $50/sq ft. Which means I figured about $60 a sq ft. I am going to go with 2 story duplexes (3bdrm/2bath/1,400 sq ft) to help keep the cost of foundations and roofs down.

In a perfect world, my scenario would look like this:

1) Lots would be paid down to about 45-50k so I'd owe about 12k per lot. And I'm hoping that the lots would jump up to about 35k to 38k or so (I think they'd actually appraise out at about 28 to 30k today based on the area).
That should give me 15k in equity on the lot (70% of 36k minus = 27k minus the 12k I'd still owe) to put towards the down payment.

2) My estimate on the duplex would be 85k per side (building only - not including the lot) or roughly $60/sq ft. Again, my brother in law (small time builder) quoted me $50 but I figured I'd add the 20% just in case.

That would mean 170k for construction costs.

3) My loan would require 30% down or 54k minus the 15k in lot equity so about 40k.

I would then build the first duplex. After I was done, I would owe 12k on the lot and 130k on the duplex = 140k total. Payments, assuming 5% loan, amortized over 30 of about $700 to 750 per month. Taxes and insurance would be another $400 a month for both (taxes run about 1,800 for each side of roughly the same size and age out there now).

4) End result. I'd be paying roughly 1100 to 1,200 a month in PITI and my rents would be total 2400 to 2,500 for both sides of the duplex.

Again, my return won't be anywhere near what I'm seeing today on my deals where I'm putting down 0 to 5k and the houses are generating $400 a month or more.

But I'm thinking this still gives me a way to chunk in a total of 8 new doors at a really nice number (500 to 600 a month) to help me continue to grow my portfolio. And it should give me a real good addition to have brand new construction units that won't need much repair for the next few years as well.

Any major holes to this strategy? I really think new construction was going to move and felt like tying up these lots today at prices that are 70% off what they once were just made sense. I'm guessing that once construction starts picking up, these banks are going to be a lot less likely to give away any lots.

And the fact that I was able to do this with 15% down was even better.
I know I'm putting another 15% down in a year but, by then, my rental income from my current properties will easily have been able to replenish my reserves so it won't even be an issue.

Had I gone to get loan myself, I don't think a bank would have let me close on a loan with 15% down. The only reason I was able to pull this off is that the bank already knew me because of my two other loans. And, I believe, the fact that these lots were just sitting on their books earning them nothing.

One other note. I actually offered 80k on these lots but the bank wouldn't budge off the 90k number. They insisted that was as low as they could go given what the lots used to be worth. Since they wouldn't give on the price, I was able to get them to bump out their amort period from 15 to 18 years. Those 3 extra years saved me about $50 a month in payments.....