Would you rather buy...

[Daniel Dow]

I've been looking at duplexes recently and came across two in my area that I might be interested in. They both have the same asking price, and both have roughly the same rents, and cash flow numbers look good for both. Here are the differences:

Duplex #1:

• Traditional financing at 20% down
• $5K of rehab total to be rent ready, $5K more over the first year or so
• Safe but stable lower income neighborhood.

Duplex #2

• Seller Financing available with 1% down
• $10K rehab on both sides tor both sides at least. 
• Rather bad (but not worst) neighborhood. 

Which do you see as the better deal, and why? Both? Neither? Thanks for your input in advance.

[Ross Denman]

Personally, you have to follow the age old adage of Location, Location, Location. This is going to determine the ability for the home to hold value or better. It reduces risks like break-ins, squatters, thefts, etc. It determines the types of tenants that are interested in living at the home. On paper, a cheaper home in a bad location looks like it will bring in a better ROI... but 9 out of 10 times you will lose more money in headaches and risks and the ROI will be the same or likely worse than a better home in a better location.

For instance, most of the properties that we manage in Indianapolis are your standard 3 bedroom post WWII ranches in the $50-60k range that rent from $700-850/mo. On paper these homes look like the ROI will be 12-15% but in actuality will ROI in a 8-12% range and potentially worse. I have an investor who has 4 suburban homes that he purchased for around $120k each that rent from $1,100-$1,350. These consistently return 8-10%. The difference as follows:

• Vacancy time. The better homes need very little work to get market ready and frequently start marketing the week that the previous tenant moves out. The worse homes may be off-market for 2-3 weeks and needs $3,000-5,000 of work to get them back on the market.
• Days on Market. The better homes rent in days. I frequently see these homes rent in 2-4 days. The older homes can sit from 2-6 weeks before they rent.
• Maintenance. The older properties have probably not been taken care of as well and are older than the newer properties. You can be almost certain that you will have sporadic maintenance issues.
• Quality of tenant. Better tenants take better care of the property, pay the rent on time, leave it in better condition, etc. Even the better tenants of a lower tenant demographic may have constant problems.

Even though the price and terms may be better in the 2nd case, I believe that you will likely get eaten alive by problems. This isn't always the case, but it happens more often than not.