Duplex Chick

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With the bargain basement prices on single family home foreclosures in the marketplace, I’ve been getting calls from homeowners who, seeing the cheap house down the street, are thinking about becoming first time real estate investors.

I like that they’re thinking like that. Real estate offers investors growth in equity, an annual passive income stream that grows with the cost of living, appreciation, leverage, and the opportunity to use depreciation as a tax shield from other income.

However, most of these novice investors are thinking of single family home ownership as a path to wealth. What they don’t realize is more often than not, single family homes as rental properties do not cash flow.

In other words, the investor will have to reach into her pocket every month for money to pay the bills the rent doesn’t cover.

A duplex, on the other hand, will pull its own weight.

Surprised?

For the first time in decades, small multi-unit properties like duplexes are actually breaking even or producing positive, spendable cash flows.

To illustrate this point, this morning I pulled two properties from the Nokomis neighborhood from the MLS. The first is the least expensive home listed in the area of 42nd and Cedar.  It’s a short sale, built in 1949 with two bedrooms and two bathrooms, listed at $149,900.

Just a couple of blocks away is a 1947 built duplex, priced at $145,000. It has two bedrooms on each side, appears to be in reasonable condition,  and is a bank owned property.

Both require similar down payments, and will have mortgages at the same amortization and interest rates.

Assuming rent of $950 per month on the single family home, with the tenants paying all utilites, and the investor responsible for insurance and property taxes, this home actually has a negative cash flow of $1149.54 per year. In other words, every month, the owner has to reach into her pocket for cash in order to make up a shortfall of $95.80.

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This morning a friend asked my opinion of buying single family homes as rental properties. Believe it or not, I think it can be a great idea.

A lot of people don’t understand that investing in rental real estate can be tailored to your goals, risk tolerance and lifestyle.

There are several advantages of owning rental homes. First, leases for these properties typically require the tenant to pay all the utility bills, mow the lawn, and shovel the walk. The owner, or landlord, has fewer ongoing responsibilities. What’s more, in the event you want to sell the property and move on, there is a large pool of potential buyers in the marketplace. Some people believe this makes owning single family home rentals a more flexible investment.

The most significant disadvantage of single family home rentals is that when the house is vacant, your vacancy rate is 100%. If you can turn (repaint, recarpet, clean) the home quickly, this may not be an issue. However, if there is damage that requires more extensive repair, you may be vacant for some time; which will, of course, require you to dig into your own pocket to pay the bills.

One of the challenges I’ve personally found is if prospective tenants have children, they generally aren’t willing to move in after Labor Day. It’s, an important consideration if the home is family-friendly.

As with any property, it is absolutely essential to do an income property analysis before you write an offer. That is too complicated an excercise to try to explain here, but feel free to give me a call. I’d be happy to help.