Buying a Duplex

[Todd Lohr]

Im interested in buying a duplex and living in one side while renting out the other. I live in Southern California where home prices are much higher so im wondering if there is any formula I should use as to what is profitable and a good deal. Ive looked at a couple places in the 250-300 range, where rents are around 1,000-1,200 for a 1 bedroom, and 1300-1500 for a 2 bedroom. Anyone have any tips, stories, or ideas for a 23 year old looking to stop renting? Thanks!

[Jon Holdman]

Read in the rental property forum. There are several sticky threads that talk about expenses.

I would evaluate this purely as a rental. One of the things you will learn in those threads is that operating expenses, capital and vacancies will eat up about 50% of the scheduled rent. So, if you buy a 2/2 duplex for $250K and can rent each half for $1500, your evaluation looks like this:

Rent: $3000
Expenses, etc.: $1500
Net Operating Income: $1500
Debt service: $1499 ($250K, 6%, 30 years)
Cash flow: $1

Yep, one dollar. This is a break even property. If you throw in a down payment your payment will be lower and so you will have some cash flow. But you're really just getting that return from your cash and not from the property.

Now, if you're going to buy it to live in, you'll get an owner occupied rate, more like 5% right now. However, your "vacancy" is much higher because you're not going to be paying any rent. OTOH, the "expenses" amount isn't going to be any less, and could actually be a bit more. Presumably you won't have to evict yourself, or wreck the place, but then you'll probably do maintenance and improvements that you wouldn't do for a rental.

So, bottom line is that you need to count on kicking in $1500 a month into this deal. Some months you have both your $1500 and the tenants $1500, and your only expenses will be the taxes and insurance. Add that to the $1499 a month payment and you're maybe looking at $1800. That will leave you with $1200 in hand. Stuff that into a savings account for the property. At some point you'll have a vacancy, and only have your $1500 plus some money out of the savings account to make the payments. Or, you'll need a new furnace or roof or sewer line. Or, you'll have to do an eviction, which is a long time period effort in CA. If that happens you'll have 4-6 months with no rent and a nasty next door neighbor.

Be sure not to miss the drug dealing tenant thread.