Advice on Duplex

[Brad L.]

Hello,

Need some advice: My wife & I are currently weighing our options between pulling the trigger on a duplex or waiting for a couple foreclosed homes to hit the market. 

The duplex we're looking at is only 2 doors down from the duplex we currently own, so that's very attractive to me. It was built in 1992, and is in great shape overall. The roof & air conditioning units are original, so I know we'd definitely need to replace them within the next few years (praying for hail). Appliances on 1 side also need to be replaced.

The numbers look as follows–

Purchase price: $144,000

Down payment (20%): $28,800 - $14,000 cash, $14,800 equity from a different property

Total loan: $130,000 (lender said equity would simply be added to loan)

Loan period: 20 years

Interest rate: 5%

Property taxes (1 year): $3,500

Insurance (1 year): $850

Monthly rent (side 1): $700

Monthly rent (side 2): $725

Each unit has 2 bedrooms & is roughly 1,100 sq ft. One side has a full bathroom in the basement, giving it 2 full bathrooms, and the other side has 1 full bathroom with the capability of adding one to the basement. Also (kind of) considering finishing a portion of the basements by adding a living area & laundry closet/room. Just not sure if that would add enough value to be worthwhile–both immediate in the form of increased rent & long-term in the form of resale value.

I used cash in my previous 2 purchases, so I'm not familiar with utilizing equity at all. I've read up on the subject & done my due diligence, but as far as actual experience, I have none. My strategy is to always keep as much cash on hand as possible by using equity, but I'm sure some of you may disagree.

I've done my own evaluation and determined whether or not I believe it's a good buy, but I'd love to hear your opinions on this potential deal. 

Please let me know if I've left any important information out–Thanks in advance.

[JD Martin]

Not really. Most people I see like to use 8-10% as a reasonable expected vacancy rate. As for maintenance and capital expenditure, that depends on a lot of factors - age and construction of the units, previous investment, current conditions, type of tenants that will be occupying the units. As an example, when I buy a unit, I do all of my heavy capital expenditures up front - heating, roof, etc - which leaves me with minimal capital & maintenance costs going down the road. Other LLs I know put a coat of paint on it and have it rented two weeks after they close; they tend to spend more on maintenance and capital expenses than I do, or they let the units decline to a point of low value. My maintenance on my units tends to run less than 10% per unit, and capex is usually absorbed on the front end so I just keep a healthy cash balance and I don't worry about those things.