Duplex for house- hack in Norman, OK: too much supply here?

Question

Hey BP!

I have a good lead on an off-market duplex with a motivated seller. I plan on house-hacking this duplex, by moving into it from my current house-hacked duplex. This duplex is just shy of two miles directly east of the University of Oklahoma. I am hoping to get some feedback from BP concerning the housing supply near OU, and in general for Norman. I know there has been A LOT of apartment development on both the East and West side of I-35, both near, and far from OU. I have only heard this from one investor friend of mine, so it may be a one-off experience, but they said that they have seen increased vacancies, and lowered rent amounts in some units in, and around Norman.  This investor friend of mine only has single family properties, and I dont quite know the location of the properties he referenced in our discussion. Also, that discussion was  about  one year ago, so I need to get an update from them to see if the is still the case.

Norman has never been a target market for me due to the increased commute to work that house-hacking would add, but this deal would allow me to walk into around 20K of equity based on recent comps, and increase my total cash-flow, from renting out my current house-hack. Plus, on it's own, this deal will still cash-flow just over $100 a door when I move out of it after the year that I am required to live there. That is after accounting for PITI, %5 of gross rents set aside for Vacancy, 10% for PM, and 10% for Maintenance.

I tend to get analysis paralysis. So, BP let me hear it! Am I over-thinking this, or is there an increase in supply that may cause too much risk to my plan (getting more cash-flow, while increasing equity in current properties, and obtaining Financial Independence ASAP)?

Kara C. · Answer

I have 4 properties in Norman, my brother has 3, and my parents have one.  All SF houses.  We've noticed increased rental supply with all the new development in town.  We've managed to keep rents mostly steady, but in the past we were able to increase the rents yearly or at tenant turnover.  I did have to lower the rent significantly on one unit when it came vacant last fall in order to fill it.

We're past the prime summer rental season, so even if you closed quickly on the duplex, it would be harder to get a tenant at this time of year, and you might have to offer a lower price to do so.

I also think that your figures of 5% for vacancy and 10% for maintenance are low.  I budget 10% for vacancy and 20% for maintenance/capital improvements.  Of course, my actual expenses vary from year to year.

I noticed that you mentioned 10% budgeted for property maintenance though...do you not manage the other side of your (current) duplex yourself?  Self-management isn't for everyone, but if you are just managing the other side of a duplex you live in, it would be a pretty easy way to save some $ and get that per-door cash-flow higher.

I'd say what it boils down to is: how good a deal is this?  Is the increased income going to be worth the extra time and gas money you spend on a longer commute?

Finally--in general I expect rents in Norman to stay steady over the next few years.  I'm not expecting to be able to increase rents for a while.

Andrew Terrell · Answer

Hey Kara,

First off, thank you for the detailed response! You provided some great insight, which pretty much echoes what I have heard regarding supply. I wonder if this will equalize over the next 3-5 years? This weekend I will look at some stats on population growth vs. housing supply in, and around Norman to get a better idea.

I originally used 10% for a vacancy rate when analyzing deals, but I have seen more than one economic report on the OKC metro that shows real vacancy rates sitting around 8.5%. The 5% value that I use now, came about from my experience managing my duplex, and a SFH rental that I own in Midwest City. 5% is the real vacancy rate I have seen between those two properties, since I started investing in real estate in  January  of 2015. I know that is a short window in time.

I will run the numbers again with a 10% vacancy rate, since there is obviously increased supply in Norman that isn't going to decrease for some time.

I do currently manage my house-hacked duplex, and will manage this  Norman property, assuming I close the deal. But, when I run my numbers I  account for PM just in case I ever need, or want to hire that part out.  I tend to just save that portion now, to help increase my cash reserves  to cover MX/CAPEX, and help accumulate down payment money for future purchases. I have had higher MX/CAPEX expenses than when I ran my original numbers on my current properties, right around the 15% mark, but that was for the first two years of owning my properties. Since then, those costs have lowered considerably. Obviously, like you stated, those are variable costs from year-to year, though. Are you, or your family still able to find deals that cash-flow using your analysis method?

My realtor is the person that turned me onto this deal, and he PM's for the current owner. Both units are currently rented, one tenant is long-term and on a month-to-month lease. The other has a lease valid through June of 2019. The long-term tenant probably has a higher chance of staying, but it would be much easier for me to have them move, vs. having to buy-out the current lease of the June 2019 tenant (or do cash-for-keys). So, I would send the month-to-month tenant notice once we get a contract and start moving forward with the transaction.  My plan is to only live here for the 1 year owner-occupied time  requirement, and then purchase something back in Midwest City, or  Oklahoma City. Also, I have worked out a deal with my realtor that I will place a tenant in the unit I reside in once I leave, and he will PM the property for me from then on.

I plan on doing a test commute this week to see if it's something I am willing to tolerate. I will also see what the added commuting expenses will be.  My realtor and I will be doing a walk-through sometime this weekend.  He is sending me more comp information too. So, I will have a better idea of what kind of shape both units are in, and see if my value assumptions are accurate.

Rhett Tullis · Answer

oversupply is an issue in many parts of okc metro.  the out of state folks have hurt us in some ways.  if you are flexible on pricing everything still rents but not getting the increases we were getting, although some of this may be related to the oil and gas industry as well.

Duplex for house- hack in Norman, OK: too much supply here?

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