Duplex Chick

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When I was a kid, every now and then my parents would say, “let’s go for a drive”.

They never seemed to have a specific destination in mind. They’d just load us all in the station wagon and take off.

 Gas was cheap, so I think it was their idea of inexpensive family fun.

Of course, nobody can afford to do that today.

Every now and then, some of the real estate “investors”  who call me on the phone remind me of my parents in those early days.

They don’t seem to have a particular plan or destination.

For instance, when I ask them what kind of cash on cash return they want on their money, I am greeted with silence.

This is usually because they have no idea what I’m talking about.

Cash on cash return is simply the amount of money you take out of a duplex investment every year compared to the amount you put in.

For example, if a duplex has a positive cash flow of $5000 a year, and your down payment on it was $50,000, then your money is earning a 10 percent cash on cash return. (5000/50,000 = .10 or ten percent).

Now, if that same $50,000 was earning $10,000 a year in some other type of investment, like stocks, a money market account, or business investment, it would be earning a 20 percent cash on cash return.

So why would you ever move it into something that makes you less?

Conversely, if that money’s generating a lowly 2 percent return for you in a savings account, why on earth would you leave it there?

What’s your ideal return on your money– provided there’s not too much risk?

If you know that before you begin, you’ll never end up financially lost.

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When I first sit down in the office with a duplex buyer, one of the first questions I ask is, “What are your goals in buying a duplex?”

For investors, the answer may be a certain rate of return; for most, that is defined as a specified percentage of cash on cash return. If the investor rehabs properties, her goal may be for a certain profit margin.

For most owner occupants, the goal is to find a nice, comfortable place to live, with their portion of the mortgage payment not to exceed a specific dollar amount.

Much of the time, I’m able to find a property that meets these main objectives in a relatively short amount of time. 

But what I find, time and again, is when I do, clients come down with an acute case of “Analysis Paralysis”.  They get so bogged down in the minutia of the numbers that they fail to act. And while they’re analyzing, somebody else buys the property.

Almost always, the numbers they’re crunching, or criteria they’re evaluating, aren’t in keeping with the information provided  in our initial meeting. 

This usually has to do with suddenly wanting to make a lower contribution to the mortgage payment, or no longer being  ”willing to do work” . Sometimes, buyers decide they want the property for a greater discount; even though it’s already on the market for 30 – 60 percent less than what it sold for three years ago.

What do I attribute this to?

Fear.

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In my efforts to cover the housing components of the ever-changing stimulus package, I left some important news unreported this week.

Fannie Mae changed positions on the number of mortgages a single investor can have on one to four unit properties. Until last August, both Fannie Mae and Freddie Mac would purchase up to ten mortgages from the same borrower.

That policy was changed last summer in an effort to curtail bad mortgages. Of course, this was laughable. Most  investors with that many properties are experienced professionals. They wouldn’t have purchased the Minneapolis duplex or fourplex in the first place if the numbers didn’t make sense.

Apparently Fannie Mae now understands this too. As Freddie Mac usually copies whatever Fannie does, look for similar news from them in the not too distant future.