Live-in duplex: worthit if it doesn't pencil out?

[Ben D.]

Hi everybody,

I've been helping one of my family members look for an affordable SFH for a few months now but given how hot the Portland (and vicinities, i.e Salem) Real Estate market is, it's been a very challenging experience. This is due to the nature of the prices that keep rising, the buyer competition and the time commitment involved from everybody.

We have also been looking at a duplexes with the intention of living on one side and renting the other, to lessen the impact of a more expensive property but the numbers don't seem to pencil out. Another issue here is that the, the vast majority of the somewhat affordable ones are not in the best areas or need a lot of work. Given that they will live in it, it makes me pause for a moment and try look at things outside of the investor mindset. 

We have come across a somewhat nicer one outside of Portland, selling for about 300k, with a GRM of 13.54 and current Cap Rate of 5.32% (if both sides are rented, which they won't be since they'll live in one). What I'm thinking is that given that it is a 20 year old duplex, it shouldn't require much maintenance. With that said, I do account for management fees (10%), CapEx (5%), Vacancy (3%) etc. for worst case scenarios in my spreadsheet when I run the numbers. This GRM seems high from an investment perspective but seems to be the norm in the current climate, especially in Portland where I've seen GRMs as high as 17.

What has made this a bit more difficult is that the agent I've been working with has not been able to provide rent pro formas for surrounding properties so I'm manually evaluating the rents through Craigslist, Rentometer etc. to see if there is room for an increase. Is there an official database of reported rents similar to RMLS? 

The questions I have are the following:

1. In a competitive market such as this one, all properties seem to be overpriced and don't seem to meet any of the basic investor rules, 1% rents, 50% expenses etc. Does it make sense to buy such property? 

2. Does living on one side reduce the value of "numbers have to pencil out" thinking? The agent I'm working with has suggested that they should be happy if they get a place that's safe and don't pay more than asking price. Any extra income should be considered a plus. 

3. The question that everybody wants to know the answer to...when is the market going to bottom out? 

My concern with this is, I don't want them to be in a pre-2008 scenario to where the value of their property drops 25-40% a yer or two after they buy and then they get stuck.

However, with the same token, my other concern is that as we sift through properties, prices keep going up. Would now be as good of a time to buy as ever?

What do you guys recommend? How would you address this situation?

Thank you very much,

Ben