What is the allure of a duplex such as this one that doesn't make any sense numbers-wise (as far as I can see)?

Question

I see a lot of duplexes like this one:

http://www.realtor.com/realestateandhomes-detail/5...

While that is a bit of an extreme example (a lot of them will pull ~1600 in rent), there are still a *ton* of duplexes out here that are nearly 300k and make ~.005% in rent. Perhaps it's not a good deal, yet people are buying them - what am I missing? Are these people praying for massive appreciation gains? The house I linked in particular doesn't even cashflow $0.. it would cost you money to own it.

Ali Boone · Answer

A few potential reasons:

- Because people don't know how to run numbers and how to make sure they are profiting on a rental property, i.e. major lack of education

- Some live in markets where they don't think there is any way to get better (should not be the case in Minnesota)

- Some are banking on appreciation (should happen in LA, not Minnesota)

- As I did, a lot of people grow up just hearing that if they own properties they are good. Then take that back to my first point.

Francis A. · Answer

@Brock Y.  It's great to hear your duplexes in Minneapolis are cash flowing despite the purchase price!

@Marcus Johnson from Richfield, MN owns a duplex in the Hiawatha neighborhood of Minneapolis that he's happy with.

I was in Minneapolis/St Paul a few weeks ago to check out potential neighborhoods in which to purchase a duplex next year.

It  looks like southern Minneapolis (South of the 394 fwy in the west and  south of the 94 fwy on the eastern side of Minneapolis and stretching  into St Paul) are the areas to search for properties. Cool city I must say! It has a little bit of every thing bigger cities have.

Investors  who specialize in a little less "desirable" neighborhoods might venture  north but I'm staying in Southern Minneapolis and St Paul.

Is your duplex in South Minneapolis or St Paul? And are you going to be focusing on purchasing more properties there? Happy for your on going RE investment success!

Faith K. · Answer

Although several people touted the S Minneapolis triplex as I good choice for an owner occupant, it seems that investors are raising the prices.  A friend tried to buy a duplex for several months this year but was getting outbid by investors.  He finally got one that was open to only FHA buyers first. I don't know who is out overpaying around here, but it seems like a rent to price ratio of 0.5 - 1.0% is common for anything on the MLS.

Bob Hines · Answer

With this being a 3 bed with 2x 1 bed units, it is set up perfect for an owner occupant to live for free/cheap.

I have seen areas of town that are good, solid areas, people will pay $300k-$350k for a 4 family that will rent for $550-$600/unit.  It doesn't make much cash flow sense but the people that are buying them are thinking that it will be easy to rent to good tenants and will be easy to manage so they will add their own labor and money in repairs over the years and then in 30 years, around retirement time, they have a fully paid off building that tenants bought for them that they can either live off the rents or sell for retirement.  They view it as a part-time weekend gig that provides an extra forced savings account for retirement.  So, in that light, it does begin to make a little more sense to a casual investor.

James Wise · Answer

Investors are not the only ones who buy properties.

People always forget that owner occupants drive market pricing.

William Hochstedler · Answer

This just went under contract for rents at $975/mo.  151 days on market, but they do sell without any polishing.

http://www.realtor.com/realestateandhomes-detail/4...

Wm

Darrin Carey · Answer

There are 2-4 unit properties in the Dayton area that would have negative cashflow, even with 20% down and self managing. I've spoken with several sellers on these types of properties, and asked why they bought them initially.

1. My accountant/friend/family/co-workers said Real estate is a good investment.

2. I needed the tax write off.

Further digging also revealed that most did not understand the expenses that go with real estate ownership, (Management, Vacancy, Repairs, Maintenance, etc), and they all significantly underestimated what it would cost, and/or how long it would take to do it themselves.

A couple had agents who told them what "great" deals they were (Rent-PITI=Profit)

One guy admitted he bought it just so he could brag to his friends that he owned it.

William Hochstedler · Answer

This is a triplex, right?

If the advertised rents are right, it's rent to price is 0.8%.  Although it is far from the 2% rule, it will cover PITI.

These numbers are pretty similar to our market, at least on the MLS these days.  Outside of the totally jacked deferred maintenance properties, we see older duplexes with good parking and near the university sell for around $150K with around $1000 in monthly rents.

Typically there are two types of buyers for these the owner occupant and the unsophisticated cash investor (or large down) who is nervous about equities and has been getting almost nothing in more conservative investments that likes our area for sentimental reasons or its stability.

If you look at the owner occupant scenario, they could live in the 3 br and rent out the other two units for $1250/mo.  <4 units will go FHA.  If you use 75% of the rents as income, you would be left with a monthly payment for the 3BR unit of under $650/mo PI only (through a kind of convoluted rough calculation).  The question is what kind of 3 bedroom SFR's are available in that market for under $120K?  Also, even with expenses, $650/mo to own sounds a lot better than the advertised $1225/mo to rent.  This type of investment can make a lot of sense as a starter home.

The out of area cash investors who pay a premium for slim returns are a puzzling story to me too.  With 30% down and using the 50% rule, this would leave close to a 2.5% cash on cash return.  Better than CD's, with amortization and appreciation to boot.  We usually find these buyers are out of state (typically California) with some nostalgic attachment to the area--either grew up here or went to school here.

If you look at the alternatives these two types of buyers have--first time home buyer who qualifies for under $150K and can go FHA, and the California buyer with $100K who wants some degree of geographic familiarity--what are their other investment opportunities that will do better for them if they're not in the business?

It makes the multi business pretty tough for us in our market.  We have never bought a turnkey 2-4 unit multi off the MLS.

Wm

Engelo Rumora · Answer

Hi Brock,

Thanks for your post.

As the saying goes "There are many ways to skin a cat" haha

Just as an FYI, that the gross rent on a $60,000 duplex in Ohio would be around $1,000 - $1,200pm making it $5,000+ in monthly rent if 5 where taken into consideration.

Also, $60,000 would buy turnkey and decent B class blue collar area.

Thanks for reading and have a great day.

Brock Y. · Answer

@Engelo Rumora Not that I disagree but rents are substantially higher in Minneapolis than throughout Ohio. Just depends if you want to buy a 300k (property in question is overpriced FYI) property making 2500 gross/month or 5 60k properties making 3500gross with more repairs, 5x taxes, etc. Not defending either market over the other just point out they are different,

What is the allure of a duplex such as this one that doesn't make any sense numbers-wise (as far as I can see)?

Most Popular Reply