Purchasing a duplex at retail. Good idea? Bad idea?

Question

Our tentative plan is to buy a duplex in our Denver metro area market, rent out the smaller half while updating the the side we live on then vice-versa. Eventually moving out and renting bother sides. Punching the numbers seems to be good cash flow opportunity overall even with the high market we live in.
Good idea or bad idea? Should I leave as is and not spend money on upgrades other than paint and other cosmetics?
This would be a first time in this process for us, any tips or insight would be helpful from those who have done it.

Herndon Davis · Answer

If the property can compete at market value rent with the properties that surround in its "As-Is" state,  then yes, slap on a coat paint, replace the carpet, shine the hardwoods, buff up the walls and replace the wall sockets and the door knobs.  HOWEVER, if the property can't compete, then do NOT attempt to rent it out.  Take the time and renovate one side, live in the other.  Then move out as you renovate the other side.

Jason Breton · Answer

@Charles Conroy I did this 16 months ago in Denver. It turned into a bidding war. Looking back I likely overpaid and the market has cooled off a little, which hasn’t helped. Both units were renovated to different levels of quality roughly 15 years ago and I chose not to upgrade and move in / rent, as is. That said, I live in the nicer 1st floor 1br/1ba unit and rent the upstairs 2br/1ba on Airbnb. Airbnb pays 80% of the mortgage and has an average yearly occupancy of 75-95%. The issue I’m having now is the exit. LTR structured the right way will barely cash flow. I’m thinking now, due to some great guidance on BP, to leverage medium term furnished rentals as a way to exit and sustain higher cash flow.

Couple takeaways I’d point out:

1. I did my first deal and learned a ton about owning a rental including how to successfully navigate Airbnb. My duplex is in an emerging part of Denver, so long term appreciation should be good. Definitely don’t regret it.

2. However, I didn’t spend enough time upfront really analyzing the exit prior to buying. Thought that Airbnb would be an option and clearly regulation is moving further away from friendly.

3. Airbnb is the most profitable option, which you could totally do in your situation. The condition of the unit is important, but not as important as you may think. It’s all about supply/demand. High demand in Denver and dwindling supply due to regulation.

Good luck and have fun!

Christopher Phillips · Answer

@Charles Conroy

You'll have to look at the quality and costs of the upgrades. What people put in their primary residences usually is a higher quality than they would put in a rental property. The best gauge would be to look at other rentals and what level of quality people tend to expect. Examples - wood floors vs. carpet. Stainless steel vs. white appliances. Quality of the kitchen cabinets. Quality and style of the counter-tops.

And then you would have to look at if there is a differential between top rents and interior condition. If you can't push the rents up with the upgrades, then stick to the basics.

Calvin Ozanick · Answer

Both of these guys have the right idea. If you are choosing to live in the unit, then be sure you still treat it as an investment. Be sure you know the value of the upgrades when considering the house as a whole not as a residence. If you do that, it should be a good deal and a good start for you.

Doug Woodville · Answer

I think this is a great idea. In fact I'm trying to do the same thing myself because of the high cost of entry to SFH's in the area and I'd like a little help on paying the mortgage month to month. In addition to what @Christopher Phillips said I'd make sure your exit plan is solid and can withstand the few years of rehab time it might take (just making that time frame up, maybe you'll be much quicker).

Chris Mason · Answer

Typically, unless the buyer/investor has years of marketing or sales experience, paying the retail MLS price is the only viable option.

Sally works at Widget Express, as the Assistant Director of Marketing. She works hand in hand with the sales division to ensure that the marketing a) gets consumer to reach out to WE's sales staff and b) sets expectations so the sales staff can close on those 'leads' and sell Widgets.

Sally does this for a living, day in and day out. It's not rocket science for Sally to apply what she already knows (she reads reports daily about the latest and greatest in marketing) and get a great off-market deal. She's going to market to find motivated sellers, and she's probably reasonably competent at the sales side to close on that purchase for below market value. Sally has an unfair advantage in that area.

Fred thinks he's going to pick up a book or spend a few hours listening to podcasts and repeat Sally's achievement. Fred might pull something off, in which case good for him. But, more than likely, Fred's going to be spinning his wheels while his local real estate market appreciates another 15%, if he insists that a book can replace Sally's years and years of full time day-in day-out experience and expertise. Whoops.

Fred, however, does something for a living that gives him another advantage. Finding what that unfair advantage is, and capitalizing on it, is probably where Fred will kill it. We'd have to know Fred's experience to help him identify that. OP, I didn't see where you mentioned your background.

Sales and marketing makes up like 15% of the working US population, but they easily make up >90% of the deals that cross my desk wherein the person got it for 20% or more less than the appraised value. Of that remaining 10%, most of them have a "not technically sales" sales job... a high school teacher is "selling" those kids on studying and doing their homework on a daily basis, for example, and on the notion that Algebra isn't mysterious witchcraft, in fact it's something that you can understand and apply to your daily life.

Tanner Marsey · Answer

Now: bad idea.

20 years from now: great idea.

Scott Henrikson · Answer

@Charles Conroy retail isn’t bad for everyone. The important question is does it cashflow with your market analysis numbers? Don’t trust the mls 100%. If it makes money... it makes money!

Bill S. · Answer

@Charles Conroy buying retail is fine if it works for you. Trying to get a deal on too many fronts often means you end up with no deal or a bad one because without experience you don't know a good deal from a bad one. Fix the property for the kind of tenants you want to attract to live there. Personally my mistake was not using nice enough finishes when I started out. I read all the posts about how Formica is "good enough" for tenants. I ended up with "good enough" tenants. When I spent a few more $ on finishes I got the good tenants while everyone else was dealing those that were good enough. Now days everyone watches HGTV so they want (even expect) the nice stuff too. I would avoid the thinking that "this is what I would want so that's what I'll do. Do some market research and see what's really expected by the kind of tenant you want to attract. Keep in mind, the large big box complexes often do lots of market research so their units meet customer demand.

Dennis M. · Answer

As Kramer would say - “retail is for suckers !”

Purchasing a duplex at retail. Good idea? Bad idea?

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