Question about investing in duplexes

[zebedee]

I'd be interested to hear from anyone who owns duplexes, fourplexes. I've been looking into purchasing a duplex but from what I can see, when you decide to sell, you can't sell it for what the appreciated value is as the buyer would not be able to rent it for enough to cover the costs.  I've seen a number (particularly here in CA) that are being offered for way under the appraised value and I still won't touch them as the cash flow is minimal

So, what's the appeal? How do you make money? Do you pretty much ignore the appreciation and just enjoy the cash flow?

[propertymanager]

With all income producing properties, you should buy based on the positive cash flow (profit potential).  As you are seeing, smart investors will not touch an income property without receiving a proper cash flow.  During real estate booms, prices get skewed upward due to the number of new (and temporary) speculators thinking that it is easy to get rich buying just about anything in sight.  In reality, they are correct - it is easy to get rich by purchasing just about anything during these times, but nearly all of them lose there money when the market turns lower.  This is because they keep trying to use a boom strategy during a bust cycle.

So, the answer to your question is that you should buy any rental, SFH or multi, based on the qualilty of the cash flow.  My minimum criteria is for the monthly positive cash flow to be AT LEAST 1/2 of the mortgage payment.  However, I have multi-unit buildings with the monthly cash flow nearly 3 times the mortgage payment.  With rentals, cash flow is everything.  If the property appreciates, that's just icing on the cake.

Good Luck,

Mike

[Rich_in_CT]

My motto-  Appreciation doesn't pay the mortgage.  

[zebedee]

well you're both missing my point - if you can get cashflow AND appreciation from a SFR why bother with  multi family units?

Looks to me that , at best, they can help diversify a REI portfolio by giving you good cash flow and limiting your risk - if one tenant moves out you can still pay the mortgage with the rent from the other tenants whixh is not the cse with SFRs.

Maybe I just answered my own question...!

[jmarmole]

My minimum criteria is for the monthly positive cash flow to be AT LEAST 1/2 of the mortgage payment.  However, I have multi-unit buildings with the monthly cash flow nearly 3 times the mortgage payment.  

What City and state do you invest in?  In the Northeast it is becoming hard to find properties that can even cover the mortgage and expenses.  Is is the property you own RE that you bought years back?

[john_00]

I purchased a duplex in upstate NY many years ago. It is now paid off and has probably done most of it's appreciation early on. I would appreciate any opinions on the best way to leverage this investment for the future. I was wondering about selling and investing in a single unit close to waterfront (not in NY) for the appreciation and possibly moving there on retirement.

[kdhastedt]

John,

Another possibility is to sell with owner financing to another investor.  You would still have an income stream (without any landlording headaches) and only owe capital gains as they come due...

Keith

[john_00]

Kieth,

Thanks, that would be an option but I'm looking to leverage and build on the equity in the duplex.

I read about selling one property and buying 2 more to rollover the profit but I wonder if selling and buying a single unit in another location (with better anticipated appreciation) would be a good way to go. It would involve paying someone to manage the property. I am not incorporated and not sure what the tax ramnifications would be.

John

[zebedee]

if you do a 1031 exchange , so long as you roll over all the money you get from the sale of the duplex, then you won't pay tax.

If you're planning on living in the property you buy (I'm presuming you're thinking of buying a waterfront SFH), then so long as its been a rental for a couple of years, you'd have no problem moving into it and not paying capital gains. You would have the added advantage of getting the 500K Capital gains exemption (if you're married) on the sale of the property you're living in now

[bgormley]

I own 4 duplexes with most units rented. I think it was the smartes thing I've ever done. One side pays the mortgage and the other side is free money.  I've been afraid to buy a single family for that very reason. However, I'm now thinking that with the income from the duplexes I could make payments on the SF when I have vacancies or until I can sell it.  I may try that next.

[henryinma]

if you do a 1031 exchange , so long as you roll over all the money you get from the sale of the duplex, then you won't pay tax.

If you're planning on living in the property you buy (I'm presuming you're thinking of buying a waterfront SFH), then so long as its been a rental for a couple of years, you'd have no problem moving into it and not paying capital gains. You would have the added advantage of getting the 500K Capital gains exemption (if you're married) on the sale of the property you're living in now

I think the law on 1031 exchanges changed recently. I seem to recall that it had to be owned for the last 5 years before it could qualify as a primary and then only if you never had the intention of moving into it in the first place. Gets tricky, consult a professional or do some google searchs on 1031 exchanges.

[VickyS]

My first property was a duplex. - Live in one side, rent out the other.  It was great.  My out of pocket housing expenses were $200 a month and most of that was electricity for air conditioning in South Florida!  What a great way to earn a market rate salary at  your regular job, and live at a low expense.  

The investor's benefit of buying a duplex over a single family home is RISK.  Imagine this: for whatever reason, your tenant moves out or fails to pay their rent.  In a single family residence, you better be able to carry the property out of pocket.  In a multifamily property, the liklihood of losing all of your tenants simultaneously might only occur in a disaster and then you should have insurance to cover loss of rents.

The last factor is the income approach to valuation.  Albert Lowery explains increasing rents as a way to increase the value of your property brilliantly and in great detail. I suggest you grab a copy of his seminars on CD with related workbooks.  As a thumbnail sketch of what he talks about: He suggests increasing rents by $50 a month after renovating a property which will increase the value of the property by $50K.  If one tenant in a single family has to pay that increase you might loose the tenant.  If you can spread that increase over a couple of tenants, it might be a palatable $10 to $25 increase in rent for each of a number of tenants.

[reihome]

thats all i invest in is multi family properties
thats where the best money is at.

[zebedee]

He suggests increasing rents by $50 a month after renovating a property which will increase the value of the property by $50K.  If one tenant in a single family has to pay that increase you might loose the tenant.  If you can spread that increase over a couple of tenants, it might be a palatable $10 to $25 increase in rent for each of a number of tenants.

Well with the ever increasing number of rentals on the market, this is easier said than done - rents are coming DOWN in a lot of markets and that was my original point - there's no way that rents can be increased sufficiently on an annual basis to improve the market value of the property so that you can sell it for what a comparable SFH would sell for. However, I agree that diversification in a REI portfolio is a good thing

[Diane]

We are in Calif. and have single, 4 and 5 plexes. In todays market the #'s don't make sense for cash flow. We bought a few buildings 10 years ago for 220,000-232,000. Those same properties are now worth 700,000-850,000! On top of that, the rents have doubled!

Back when we bought the market was down and people wanted out. We bought those buildings much lower than the owners purchased them for. It was a great time to invest. Now I'm not so sure.

When we bought, the most important thing was cash flow. We were able to put only 5% down on our first building and made a $1200 cash flow. We thought at the time "why don't more people do this"? My blog below has the whole story of our start and how we did it.

We also have a rental house. It has apprieciated nicely in the 17 years we've owned it but...I would take the plexes anyday over single family. Less stress when vacant and more cash flow is what I see.

Good luck