The Cost of Owning a Duplex

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The Cost of Owning a Duplex

Jared Baker
Hartford, WI · Member since 2016 · 162 posts · 50 votes

Hello BP!

I've started looking at duplexes and just can't seem to figure out how to make them work.  So I live in Wisconsin between Madison and Milwaukee.  There are some higher end towns in my area that have several duplex that are up for sale, but I don't see how anyone could make them work.

So one in particular I am looking at lists at $275,000. The highest rent in the area that I have seen is $1300. So in this situation we will assume I could get $1100. If I used an FHA loan or conventional loan there is only a $200 difference per month in mortgage payment. So we will use the conventional payment of roughly $1100 for this example(FHA loan is just under $1300). Using these numbers a person could live "rent free". But as soon as you realize that there is insurance, taxes, and maintenance that will be required suddenly your about $800 out of pocket a month. This is a relatively cheap duplex, most are up near $300,000. So are these duplexes really never going to work until the cost comes down, or is there something I am missing that would make these work? The idea is to house hack.

Any thoughts are appreciated!

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Christopher Sykes
Madison, WI · Member since 2016 · 1 post · 1 vote
8y

Hey Jared,

I see what you mean about the numbers not looking like they're going to work out for you (or anyone!). As it stands you'd only be subsidizing your rent, not living "rent free", and certainly not seeing any positive cash flow. 

My guess is you'll have a hard time finding a deal where you can see positive cash flow while occupying half of a duplex. Your best bet would be to keep an eye open and find a foreclosure that you could rehab while renting the other half, then switch units and rehab the other side. Of course the feasibility of something like this relies heavily upon your skill set and/or rehab budget...the more you can do yourself the more return you'll see.

How determined are you to house hack? What's your current rent? Would it make more sense to not house hack and instead rent both sides of the duplex while continuing to rent yourself? If your current rent < potential duplex rent then this might be the way to go.  Of course that might make financing trickier. 

Good luck!

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  • Christopher Sykes
    Madison, WI · Member since 2016 · 1 post · 1 vote
    8y

    Hey Jared,

    I see what you mean about the numbers not looking like they're going to work out for you (or anyone!). As it stands you'd only be subsidizing your rent, not living "rent free", and certainly not seeing any positive cash flow. 

    My guess is you'll have a hard time finding a deal where you can see positive cash flow while occupying half of a duplex. Your best bet would be to keep an eye open and find a foreclosure that you could rehab while renting the other half, then switch units and rehab the other side. Of course the feasibility of something like this relies heavily upon your skill set and/or rehab budget...the more you can do yourself the more return you'll see.

    How determined are you to house hack? What's your current rent? Would it make more sense to not house hack and instead rent both sides of the duplex while continuing to rent yourself? If your current rent < potential duplex rent then this might be the way to go.  Of course that might make financing trickier. 

    Good luck!

    1Reply
  • Eric Schmid
    Minneapolis, MN · Member since 2017 · 46 posts · 31 votes
    8y

    Jared,

    I am just a little fish on here, but it sounds like you're looking too much into the high end properties. Try to look into value add properties...duplexes that you can househack, but rehab while you're living in the one unit and rehab the other one later. Of course, the rehab can cost a significant amount depending on the project. Also, sometimes you may be able to live "rent free" or pay just a little, but that's much better than whatever you're paying for rent now I would assume. That said, once you move out, you have to consider the cash flow from your side as well. Even if you're just barely making "rent free" or cash flowing a little, you are still earning equity. These are just thoughts! Otherwise, try looking in nearby areas. Hope that helped!

    Eric

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  • Scott Schultz
    Rental Property Investor · West Bend, WI · Member since 2015 · 931 posts · 598 votes
    8y

    Jared, 

      no one buys those properties to make money or have great returns, they buy them to be able to live in a neighborhood they may not otherwise be able to, or want the income to offset their housing expense. there are plenty of areas near where you live that you can find Sub $100K duplexes that get $900+ per unit. the Madison and surrounding area market is insane, hard to make a dime there unless you have endless cash sitting around with no place else to go with it. 

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  • Jared Baker
    OP
    Hartford, WI · Member since 2016 · 162 posts · 50 votes
    8y

    Thanks for the responses guys!  After reading Scott's book, Set For Life, I'm trying to reduce my housing expense.  Right now I am paying about $700 in rent and I would like to purchase a duplex and house hack.  Would it make sense to look into other areas to invest when my goal is to reduce my housing expense?

    0Reply
  • Jeffrey Holst
    Investor · Chattanooga, TN · Member since 2016 · 676 posts · 543 votes
    8y
    Buy two rent three units and you can live for free in the third. if that's not possible be ok with living a little cheaper while paying down the loan on your nicely located duplex.
    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    Jared Baker I used to live in Hartford. What a small world. I would look closer to Milwaukee for what you’re looking for or maybe you n Menominee falls? I used to live in an apartment right off the highway there in Hartford. My landlord bought the 8 unit I lived in for 250k apparently, so t can be affordable if you know where to look.
    0Reply
  • Caroline M.
    Los Angeles, CA · Member since 2017 · 13 posts · 1 vote
    8y

    You can also see if there's a finished basement which you can stay in and rent both sides ...

    0Reply
  • Samuel Vogt
    Pittsburgh, PA · Member since 2017 · 36 posts · 23 votes
    8y

    @Jared Baker Have you analyzed the properties as if you weren't going to live there yet?  I have a duplex under contract, and what helped me when "running" the numbers was that people suggested to run the numbers two ways. 

    As a resident, and living in one half.

    If I were to rent both sides as an investment property 

    Usually if it makes sense as a strict investment property, then it makes sense for you to live there if it's a desirable neighborhood. Also, have you thought about getting a roommate for your unit? That could be a way for you to possibly cash flow.

    0Reply
  • Jay Helms
    Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
    8y

    @Jared Baker - if your goal of investing is for cash-flow, a QQQQuuuiiiiccckkkkk TIP to analyze properties is the 1-2% rule. Meaning monthly rents need to equal 1-2% of the sale price. For easy math, $1,000/month rent ~ $100,000 sale price would be willing to further analyze. I believe what you're seeing is the affects of a hot market and sellers trying to find a sucker. Stick to your #s, stick to your goals and keep searching for that right opportunity. 

    1Reply
  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    8y

    @Jared Baker You are on the right track and you are feeling your way around. What you are fining is that you can't live in a nice house in a nice area and live 100% rent free. You can probably save 70% of your rent. I think I have bought almost a dozend house hacks with clients in the last year and none of them were 100% rent free. Even the ones in cheaper neighborhoods won't cut it, because as your acquisition cost is going down so is your rent. You can't take 50% of the income potential off an investment and still expect it to throw off cash. That would be too sweet. Especially if you buy it with an FHA loan, so essentially you have a third party buy it for you.

    Hartford is relativley cheap compared to Madison, but a lot more expensive than Milwaukee propper. The housing stock in the Milwaukee suburbs like Menomonee Falls is mostly single family homes, once in a blue moon you will see a two family come on the market, sometimes thats an old farm house.

    What you are missing is the bigger picture. There are actually two phases in a house hack. Phase one you live there and safe up down payment for your next. In phase two (after min of 12 mo) you buy a second duplex and move, so now you have one that will cash flow and one that you live in. Overall you should be in the gree at that point. You can repeat that as often as you want, lenders typically require you to live in a property with ownber occupied financing (low down) for at least one year.

    A quality property will be better for you in the long run. Many of the cost to expense ratios are more favorable compared to a chaper property. Think of rental income vs. cost of a roof, cost of water heaters etc. Also your debt pay down is much more significant with a 300k property.

    Like I said you are on the right track; you have just discovered that there is no free lunch in real estate either; but it's still an increadible vehicle to change the trajectory of your life! Hope this helps!

    0Reply
  • Jared Baker
    OP
    Hartford, WI · Member since 2016 · 162 posts · 50 votes
    8y

    Thanks for all the replies!

    @Samuel Vogt I did do the analysis with both sides rented out and even then I would be looking at maybe $200 out of pocket that I would have to pay, but I would still have to find a place to live then!

    I would look at properties closer to Milwaukee, however it seems counter productive if I'm trying to lower my expenses.  I currently work at a company that is located just south of Hartford near the higher end neighborhoods.  If I look at places farther away, I may find something cheaper but I'll end up paying more for transportation.  Even living in Menomonee Falls, my commute would almost double in time and have the additional cost of gas/wear and tear on my car.  

    0Reply
  • Jarrett King
    Professional · Nashville, TN · Member since 2015 · 29 posts · 25 votes
    8y

    As some have said like Marcus above, after that minimum 12 month live in period, you can move on to a new house hack opportunity and you've been paying down a note and building equity while only increasing your housing expense $100 ($800 in expenses vs $700 in rent currently). Hopefully, by that point, you can increase the rent on the existing tenant and push your unit to match that to cover some or all of that $200 shortfall you're underwriting as well. If it's not working though, don't force a deal. Put in an offer that makes the numbers work at something you're more comfortable with. 

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  • Andrew Millard
    West Bend, WI · Member since 2016 · 18 posts · 13 votes
    8y
    If you work south of Hartford there’s a few lower end dups in Hartford for 150-200. Looking a little farther out might be the ticket. Mayville Horicon have dups for under 150k
    0Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    8y

    Bought 2 duplexes 2 1/2 years ago for 280 each, renting at 1350 per side; they are OK. Frankly I would not have bought them but I had settle up in my 1031x; pronto. 4s and 6s and bigger are a much better way to go but it is a seller's market most places today. Duplexes around here are 400k+ easy so there is no money to be made at those prices; no idea why people are bothering.

    0Reply
  • Corina Eufinger
    Rental Property Investor · Oconomowoc, WI · Member since 2016 · 996 posts · 431 votes
    8y

    It sounds like perhaps you were looking at Oconomowoc, Pewaukee, Brookfield and Waukesha based on the description of not finding a duplex that is monetarily feasible. That is an extremely tough seller's market right now. Most deals that are on MLS are (realtors, don't hate me) not sustainable. You will have to go off market to get a deal that might work or consider some less expensive suburbs (Waterford, West Allis, etc). If you are only interested in those markets you may need to increase your property size so there is less buyer competition. But of course you price goes up yet less competition means seller's more likely entertain varying offers.

    0Reply
  • Susan Grayson
    Real Estate Agent · Mississippi River Valley - Pepin, WI · Member since 2016 · 22 posts · 9 votes
    8y

    @Jared Baker there's lots of good advice here and this market will definitely challenge you to hone your finding deals and analysis skills. Have you thought about house hacking a SFH with roommates? You might be better able to find a fixer upper that will potentially cash flow now room by room and rent the whole house (or sell it) out later. Keep us posted on your search and progress! Happy hunting!

    0Reply
  • Jacky Tu
    Real Estate Agent · Madison, WI · Member since 2020 · 20 posts · 9 votes
    6y

    Hi all! Little late to the party (1 year later), but going through the same problem that @Jared Baker was going through. Analyzing duplexes in the Madison area and can only come to the conclusion that the market here is waaaay over priced. I'm using the Syndicated Deal Analyzer from Michael Blank and all the numbers are depressingly low....(COC is <5%, DSR is <1%). This was me analyzing with the intent of renting out both units. Won't get a duplex for less than $300k here and this is with some properties more than 70+ years old.

    0Reply
  • Justin WoodworthPro Member
    Madison WI · Member since 2019 · 71 posts · 45 votes
    6y

    @Jacky Tu

    I recently bought a duplex in Madison, owner occupy and cash flow $200 a month. The key is to rent rooms on your side of the duplex. Every deal works at a certain price, certain rent, a certain percent down.

    Its not I can't make a good return, it is how do I manipulate certain factors to create a good return.

    1Reply
  • Jacky Tu
    Real Estate Agent · Madison, WI · Member since 2020 · 20 posts · 9 votes
    6y

    @Justin Woodworth 

    Awesome! I want to buy a duplex this year but it seems like I may not be able to save enough for 20-25% downpayment. So I'm trying to see other ways to make this work. If it's not a bother, would you mind telling me about the deal? I'm really interested in how to make it work in this area...

    -How you financed it?

    -Is that cash flow per unit or total?

    -How much of that cash flow you're putting aside for expenses?

    1Reply
  • Justin WoodworthPro Member
    Madison WI · Member since 2019 · 71 posts · 45 votes
    6y

    @Jacky Tu

    Well firstly would you be looking to owner occupy? Whats your current living situation?

    The only way I made it work is through owner occupancy!

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  • Jacky Tu
    Real Estate Agent · Madison, WI · Member since 2020 · 20 posts · 9 votes
    6y

    @Justin Woodworth

    I would if I had to make it work! It seems that may be my only option since I don’t have the down payment. My parents travel a lot and aren’t home 9 months out of the year so I’m living at their house for free(sweet gig). Since I don’t have the 20% it seems like owner occupy IS the only way to make it work. And even then it would be pretty tough. 

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  • Robert Ruschak
    Real Estate Broker · IN · Member since 2017 · 65 posts · 12 votes
    5y
    Originally posted by @Jared Baker:

    Thanks for the responses guys!  After reading Scott's book, Set For Life, I'm trying to reduce my housing expense.  Right now I am paying about $700 in rent and I would like to purchase a duplex and house hack.  Would it make sense to look into other areas to invest when my goal is to reduce my housing expense?



    You will need to look at different sub markets if you are looking for positive cash flow!  The high end areas will have lower cap rate returns, whereas other areas will provide an investor a 7+ cap rate return!  Good Luck on your search 🔦 

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