All Forum Posts by: Lucas Duce

I am currently analyzing a potential duplex for purchase and I had a quick question about adding an extra bedroom and the extra rent that doing so could generate. One of the units is a 2bd/1bath with an interesting layout and is rented for $600 per month. The unit is approximately 480 square feet. It has two official bedrooms, but then there is a medium sized "living room" with a dividing wall in the middle with a larger than normal door frame just without the door. This extra extension of the living room has it's own closet and everything. The simple addition of a door would allow it to meet the requirements to be classified as a bedroom. The current tenant is already using it as an unofficial spare bedroom anyways. It is an open concept kitchen/living room area, so officially dividing it wouldn't make the new small living room unbearably cramped. If divided, the 3 bedrooms and living room would all be approximately the same size.

My question is, if I go ahead with creating the extra 3rd bedroom, can I expect to be able to get the rental increase that comes from the difference of a 2 bedroom unit compared to a 3 bedroom unit? My hesitation is that the monetary rental difference that is reflected in rentometer between 2 bd and 3 bd units is likely also due to the increase in square footage between the two. Would creating this 3rd bedroom increase the rent I could charge even if it means making an already small living room even smaller? Has anyone experienced any drawbacks from having a small living room in their rental? Any input or advice is greatly appreciated, and thanks in advance!

- Lucas Duce

Hello BP Community,

I am currently analyzing a potential duplex for purchase and I had a quick question about adding an extra bedroom and the extra rent that doing so could generate.  One of the units is a 2bd/1bath with an interesting layout and is rented for $600 per month. The unit is approximately 480 square feet.  It has two official bedrooms, but then there is a medium sized "living room" with a dividing wall in the middle with a larger than normal door frame just without the door. This extra extension of the living room has it's own closet and everything.  The simple addition of a door would allow it to meet the requirements to be classified as a bedroom.  The current tenant is already using it as an unofficial spare bedroom anyways. It is an open concept kitchen/living room area, so officially dividing it wouldn't make the new small living room unbearably cramped. If divided, the 3 bedrooms and living room would all be approximately the same size.  

My question is, if I go ahead with creating the extra 3rd bedroom, can I expect to be able to get the rental increase that comes from the difference of a 2 bedroom unit compared to a 3 bedroom unit? My hesitation is that the monetary rental difference that is reflected in rentometer between 2 bd and 3 bd units is likely also due to the increase in square footage between the two.  Would creating this 3rd bedroom increase the rent I could charge? Has anyone experienced any drawbacks from having a small living room in their rental?  Any input or advice is greatly appreciated, and thanks in advance!

- Lucas Duce

Hey Zach,

You may want to be cautious on how you have your realtor ask if seller financing is a possibility. If they simply ask: "will your seller accept seller financing?" it's very likely the seller will not comprehend the terms and benefits and just say no. Compare this to if you are able to showcase the extremely beneficial terms to the seller all written out, or even better, face to face. 

Since you were already able to meet with the seller at the showing, they seem pretty involved in the selling process and would likely be open to a quick phone call to chat about the terms, that's when you'd lay out the seller financing benefits rather than their realtor blandly asking if they will accept seller financing. 

- Lucas Duce

Hey Zach,

Assuming the numbers do work on the property and that the owner owns it mortgage free, see if the owner is open to potentially carry seller financing for 1-3 years with a balloon payment.  They would have the headache of the property out of their hands, you could offer them interest only payments for the duration of the 1-3 years (hassle free passive income for them and nice cash flow for you since it will be lower payments than a bank), use your available funds to complete the rehab, cash out refi after the seasoning period, and the seller gets their lump sum. Even if they initially do not want seller financing, if they're motivated enough and you explain the benefits, you might be able to persuade them for a win-win deal. Good luck!

- Lucas Duce

Hey Jeremy,

How much cash flow are you looking at for this property?  You mentioned that it still meets the 1% rule so you were willing to go $15K above what you thought it would appraise for, and since you mentioned this is your first time, I just want to double check that you are using other analytics than just seeing if it meets the 1% rule.  The 1% rule is great for a quick glance as you're going through properties quickly, but there are many properties in my area that meet the 1% rule that don't cash flow to what is required because of how the expenses work out. 

Especially with FHA you are looking at mortgage insurance of around $77 per month per every $100K of purchase price. So your cash flow would be $308 less every month due to the mortgage insurance of the FHA, and that's for the life of the loan unless you refinance out after major sweat equity. A good rule of thumb along with the 1% rule is making sure that the property is bringing in at least $100 per month of cash flow per unit. So a duplex would be bringing in $200 a month of cash flow at a minimum. You likely already know all this, but just wanted to state these things just in case you only analyzed with the 1% rule. Good luck!

- Lucas Duce

Hey Luis,

You would be financing this deal using FHA correct? In that case you're going to be required to live on the property for a year so your rent would be cut in half. If you're planning on moving out after a year then that first year reduced rent won't be a big issue, but you'll still be stuck with that PMI for the life of the loan. Your expenses estimate looks conservative, which is good.

Your rent estimate concerns me.  At the bottom you listed that the duplex was renovated in 2019 and is selling for $87K.  What market are you in? A duplex worth $87K bringing in rent of $1,250 per month per side seems very unrealistic.  In my Midwest market with reasonable property prices.  Even a top notch duplex worth $180K with 2 bed/1.5 bath each side is only going to bring in around $800 per month per side.  Check rentometer.com and enter the property address and compare it to the rents surrounding it.  I'm very skeptical on it bringing in $2,500 total, which if it doesn't get that much, voids your whole analysis. 

I'm also confused on your initial repair costs.  about $20K in repairs only bringing up the value by about $10K doesn't sound right.  What repairs did you figure you would have to do? Hope this helps!

-Lucas Duce

Hey Matt,

It seem's like the current tenant is a big concern of the seller.  I like how you incorporated the $725 buyer's credit in one of the offer, but maybe to make it more enticing to the seller, adding some more specificity to how the tenant will benefit would help you land a better deal.  Maybe specifics like "I'll pay for a moving company to box up all of the tenant's belongings and move it" since they're older and may not have family in town to help.  Who knows, maybe after the multiple years of a landlord/tenant relationship they became good friends and the benefits to the tenant may be more significant than a monetary incentive.  I'd try to work in a better pro for the tenant in each deal.  Good luck!

- Lucas Duce

Hello BP community,

I have been receiving conflicting information on how to estimate the property taxes during my number analysis.  My concern is if a property has significant appreciation since the last time is was assessed for property taxes, then when I purchase the property, a red flag pops up for the city since it was purchased at a higher price than last time then they reassess, and then the property taxes increase significantly.  For example, a fourplex worth $200K in my area had a 2018 tax record of around $2,200 (not sure when it was reassessed, but it was purchased 10 years ago for around $110K).  At a purchase price of $200K, using the mill rate for property tax calculation, the new property taxes would be around $3,400.  I've had trusted professional sources tell me that after paying $200K for it, that the taxes will likely raise to around the $3,400 range.  I've also had trusted professional sources tell me that the property taxes won't actually raise that much from the 2018 $2,200 range.  Which side should I listen to?  As you can guess, this large difference significantly impacts the property's monthly cash flow, and sometimes causes a good deal to fall into the not-so-good deal range when I use the more cautionary amount of $3,400.  I don't want to be shooting myself in the foot estimating too high of property taxes and end up missing an actually good deal! Thank you for any input in advance!

-Lucas Duce

Hey Luis, I'd ask the listing agent for a copy of the current owner's leases, if it's currently leased, to verify the rent roll numbers. I'm not familiar with your market, but a 2br and a 3br duplex pulling in $1,700-$1,900 seems high, especially for a D location property. You can also use rentometer.com to estimate the rent for that type of property and number of bedrooms in that area. If you suspect the interior of that property is a little more out dated or worn, then maybe estimates the rents pulling in a little below average for that area. Good luck! - Lucas Duce

Hello B.P. Community,

A potential property I am looking to purchase sits on about 0.8 acres of land. The property is a decent sized duplex at around 1,800 square feet tucked in one of the corners of the "L" shaped lot. Besides for a small cement parking area next to the building, about 70% of the remaining land is basically just an abandoned overgrown back yard. Somehow being able to utilize this extra space would make this deal even better.

I have been emailing back and forth with the county zoning department about trying to get this lot subdivided to potentially build another duplex or fourplex, but the representative at the county's office tells me that it can't be subdivided since the division wouldn't result in two 20,000 square feet lots (results in one lot being only about 18,000 square feet). I asked about possibly being able to do storage units some how, and I was answered with the same short response that it won't be allowed. Does anyone have any ideas on how to utilize this large amount of extra space if the county won't let me subdivide it? Should I attempt to keep pushing the county to try to see what they can do? I've heard of real estate investors building one or two storage units in their small back alley yards, I doubt they are subdivided that into a 20'x20' lot, so how are they doing this legally? Thanks in advance for any help/ideas!

- Lucas Duce