Splitting Duplexes as a "low cost" entry/accelerate savings?

Question

This may need to go under the dumb question category.

I understand Duplexes are not the ideal long term investment, unless you control the street or are in relative isolation amongst houses, etc..

I submit to needing to save a large amount of cash to really establish myself in MFRs (4) and eventually commercial.  But I am wondering if "flipping" a few duplexes (side by side), selling half for my purchase price + repairs and renting the other half might be a good way to accelerate the savings process.

I have seen this done and my Credit Union would require 2 loans to buy one duplex anyways, so why not?

Can anyone give me a practical reason as to why this would be a bad idea (just to get started in the business)?  I will accept Zero replies as a positive response.  : )

Thank you and best wishes to you all.

Michael Spindler · Answer

Karen Margrave

I think you are very spot on.  Effort vs. reward makes this a poor strategy.

It is not that I can't get into SFR...  REOs/HUDs are available by the boatload.  Was just trying to think of ways to accelerate earnings to build my business.

I think before I waste more mental energy, I need to get with my REIA and see what they are doing in the real world.

Thank you for sharing your insight on this.  I really appreciate it.

Karen Margrave · Answer

Michael Spindler Your first stop needs to be the planning department to find out if that would be allowed, as you would be changing from multi family to single family attached housing. Even if you cannot actually split the lot, in theory, it could be achieved by doing it as a planned development and the land etc. would be common areas with each unit having specific boundaries they are required to take care of and some kind of a common area maintenance agreement spelling everything out. However; I doubt the local entities will allow such a small development, now maybe an entire neighborhood converted would be allowed.

All the work required to do this is far more difficult and expensive than any benefit, in my opinion.

If you can't get a SFR home, why not look at a condo or another niche in the real estate market? Good luck

Michael Spindler · Answer

Mehran Kamari and Don Konipol

I really appreciate your replies.  And as you pointed out, the parameters I laid out was a one time observation of duplex I was watching from afar.  I guess lotteries do happen, but not wise for a business model.

The more I ran numbers on what dups that are currently available, the less viable this approach seemed.  So I will stick to the Buy/Hold strategy.  : )

Thank you for exploring this with me.  Best wishes.

Don Konipol · Answer

Michael Spindler, if the duplex is actually two legally separate but physically attached individual parcels (SFR) then from a legal stand point what you are proposing is easily accomplished.  If the duplex is a single parcel, your ability to split into two parcels thereby achieving 2 SFRs will depend on local ordinances and regulations as well as any zoning.  Cost in that case can range from a few thousand dollars for application, survey and re platting to being cost prohibitive including legal fees, hearings, legal actions, partitions to various governmental agencies, etc. Real estate is a very local business and as such you must familiarize yourself with the regulations concerning each political jurisdiction your proposed investment is located in.

The economic side of your equation is actually more difficult.  Purchasing a duplex for say $80,000, spending $20,000 on rehab/improvements and selling one unit for your full $100,000 investment is the same as doubling your money on a fix and flip.  I know of no rehabbers able to do this on anything but a lucky one out of one hundred basis.  Most are satisfied with a 25% markup and realize the competitive market does not allow for a 100% markup.  I have been a successful real estate investor for 35 years and have achieved a 100% profit on a short term flip exactly once, and that was due to a environmental problem I solved coupled with a bankruptcy situation in which I had a long standing relationship with the bankruptcy trustee.  In other words the chances of walking into a situation like the one you describe is less than winning the lottery.  A more realistic goal is to be able to sell for enough profit so that the duplex remaining in your ownership will rent for a positive cash flow and you will have been able to get all your money out of the deal with a 75% loan to value mortgage remaining on the unit retained.

Mehran K. · Answer

Michael Spindler Why do you feel duplexes are not the ideal long term investment? Picture having one in a nice stable area, it cash flows very well , you keep it well kept, and the you have good long term financing. I don't see anything wrong with that long term!

Flipping is always a great way to build capital quickly, but it's not as easy as it seems and you have to know your stuff. I'm even thinking of dabbling into a flip sometime soon.

As for splitting a duplex and flipping one and selling the other. It's the first time I've heard of it. Wouldn't you have to split the parcel? Check with your city and make sure that can be done. Why not just flip a house and buy a duplex?