Adding a duplex to the portfolio

[Gregory Schwartz]

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $210,000
Cash invested: $56,500

Purchased this house this December for 210k (immediately appraised for 228k). Rents are $1000 per side and are currently rented with section 8 tenants. Our plan is to update the units with 5-8k per unit driving the rents to $1100-1200 per unit. We'll enjoy the increased cash flow while we pay down the loan. In 2-5 years, we'll refinance the property using the cash to buy the next deal.

What made you interested in investing in this type of deal?

Small multifamily in Bryan and College Station, TX is my niche.

How did you find this deal and how did you negotiate it?

This was mentioned in the realtor comments for a similar property listed on the MLS.

How did you finance this deal?

Commercial loan, 25% down, 20-year amortization

How did you add value to the deal?

We should be able to increase rents to $1100-1200 per side with some minor cosmetic updating. It appraised for 228k but similar duplexes sell for 250k+.

What was the outcome?

TBD. We plan on refinancing in 2-3 years as part of a BRRRR game plan.

Lessons learned? Challenges?

It needed a new roof, I was nervous to ask but the seller happily paid for half of the total cost prior to closing!! Always ask, the worst that can happen is they say no.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

ExtraCo bank provided the commercial loan for this purchase and are very easy to work with!

[Pete Harper]

@Gregory Schwartz congratulations on investment.

I'm interested in your thinking on the ROI for improvements. I have similar properties and always have an internal debate on how much money to put back into renovations. Are you looking for increased cash flow or property appreciation?

Earlier this year I renovated a 2 BR unit for $5k. Removed dated paneling, new kitchen cabinets, dishwasher, microwave, paint and flooring. Rents went from $475 to $675. Payback is 25 months which I felt was a good investment.

My current project is another 2BR that rents for $600. The kitchen cabinets were heavily water damaged and the shower was in bad shape. My budget again is $5k. After renovations I expect to get $650 in rent. Payback is now 100 months, not great. This building has eleven more units that could use $3k-5k each. Would you invest the money into renovations to force appreciation? Or optimize for cash flow?

[Gregory Schwartz]

@Pete Harper ROI for improvements is a conversation I've been discussing a lot lately. I am initially drawn to your analysis, how long will it take to make my money back. $5k upgrade to increase rent $200/month is a no brainer. However $5k to drive rents $50/month is a little more difficult to stomach. I think it's worth looking at some of the other factors that an upgrade can provide. Will this lower vacancy (lower turn time and increase retention for years to come)? Will it attract a better quality tenant? Does this include some preventative measure to avoid those late-night maintenance requests?

Considering most of the duplex and fourplexes here in Bryan/College Station are 80's built and otherwise outdated, I plan for 5-8k to bring them up to date (LVP, newer appliances, new fixtures, painted cabinets etc). Beyond this basic upgrade, I look for a 15-20% ROI on HGTV upgrades.

To help with the BRRRR model I usually run a CMA to compare properties that have been left untouched vs upgraded. Its a little harder to determine with so few units being sold on an annual basis but here in BCS, I've seen $5-10/SF increase.

Hope that helps.

[Whitney Hutten]

@Gregory Schwartz Nice work!

[Pete Harper]

@Gregory Schwartz

I own two properties in BCS, duplex and 4-plex. All the units are 2BR 1BA. What do you think is the top end of rental market for a 2BR unit?

I’ve done the light reno; paint, flooring, updated lighting, ceiling fans and painted cabinets. Rents are $700-$750. I’m not sure if it is worth doing much more.

[Gregory Schwartz]

@Pete Harper location is critical.  Pictures and marketing go a long way. A 2/1 in a decent area should get $800, in a rougher area $700-750 and closer to campus $900. My 2/1s are south of Harvey Mitchel. With new cabinets, new laminate counters, new floor and fixtures rent for $800. That being said, I fairly easily filled my other unit (painted cabinets and new fixtures) at $775.

[Gregory Schwartz]

@Whitney Hutten thanks!!

[David Schmiediche]

@Gregory Schwartz Congratulations on the new investment! This looks like a good deal that will serve you well over the following years. @Pete Harper One question I have for both of you is Investing 5k into renovations that will increase rents by $50 is a 12% ROI. Even with the payback being 100 months, 12% ROI in my opinion is a good investment. If you don't do the renovations what else would you do with the money? My viewpoint is you can save it for your next investment or it will sit in a bank account earning you nothing. Unless you are planning on making another investment why wouldn't you take the 12% ROI?

[Pete Harper]

@David Schmiediche

My comments are more about diminishing returns. I feel it is entirely possible to over renovate. The ROI on granite countertops and stainless steel appliances is pretty slim in C class properties.

My model is to renovate and increase rents. For $700 target rent you need to make $2100/month or $13/hr. Most of my tenants are working class folks; Waitress at local diner, on social security, guard at jail, and truck stop worker. The bottom of the market is usually set by HUD at $650. If I stay in this range I feel I will be OK. My last two rentals I had over twenty applicants. Only a couple were qualified. If I raised my tents to $800 I'm afraid nobody would be able to afford it in my local markets.

What would I do with the cash otherwise? Buy more properties. I’m targeting over 15% cash on cash minimum so I’m better off buying more properties rather than renovate existing.