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Additionally to what you have heard, you want to consider the financing part as well. If you don't live in one side of a duplex, it is considered an investment property for traditional financing. That means you have to have 20% down payment and from what you were saying you need a conventional loan to even have a chance with the appraisal if one unit is in such disrepair. You may qualify for a rehab loan in that case, which is still 20 % down. Plus you have to have bids from licensed contractors, plumbers, electricians etc to find out what the cost of the repair is. Then there is a ton of paperwork.... and then after closing you have about 90 days to finish the repairs - that is not you unless you are a licensed contractor. Plus one should have money put aside for repairs that will come up at some point. What if the roof leaks and you have to dish out $10k for a new one? An air conditioner plus installation costs about $ 5000 and you have two units. I honestly think it is a great income stream under the right conditions! I would suggest to save some money before you undertake this.
Thanks Michaela - Yes, because we are not cash buyers, we were concerned with the financing which is why we worked with our mortgage broker from the start to know if this was realistic. Here, the down payment is 25% for an investment property.
I think if we were living in one unit, it would make much more sense - we could live there and rehab the other unit. I don't think the other unit is trashed, more that it's really old, hasn't been well-maintained, and the current tenant is a bit messy. It be better for us to improve and update it so we could get higher rent.
Quote:
Originally Posted by Michaela Gile
Additionally to what you have heard, you want to consider the financing part as well. If you don't live in one side of a duplex, it is considered an investment property for traditional financing. That means you have to have 20% down payment and from what you were saying you need a conventional loan to even have a chance with the appraisal if one unit is in such disrepair. You may qualify for a rehab loan in that case, which is still 20 % down. Plus you have to have bids from licensed contractors, plumbers, electricians etc to find out what the cost of the repair is. Then there is a ton of paperwork.... and then after closing you have about 90 days to finish the repairs - that is not you unless you are a licensed contractor. Plus one should have money put aside for repairs that will come up at some point. What if the roof leaks and you have to dish out $10k for a new one? An air conditioner plus installation costs about $ 5000 and you have two units. I honestly think it is a great income stream under the right conditions! I would suggest to save some money before you undertake this.
The factors that you should consider when buying an investment property depend entirely on your strategy and objectives. If you want a passive investment with yield, the most important number to consider is your Cap Rate (NOI/Purchase Price). Understanding your Pro Forma figures (what you COULD rent for) is very important, as well as the potential appreciation, but these figures can not be guaranteed. A more active investment with a value-add component would require an entirely different analysis that takes into account your cost of improvement and forward-looking ROI.
Also, keep in mind that generally, the more expensive/prime the location, the less yield you will see - as these are the more stable locations with lower risk. If you want high yield, you'll likely be looking at a cheaper unit in a less desirable neighborhood.
You'll want to keep at least a 6 month buffer on monthly carrying costs to account for a vacancy factor (time the unit sits without a tenant) and any repairs/CapEx/OpEx.
If you're not cashflow positive by 10% or more on your 'all in' amount it's a dud.
If it costs $30,000 to get it to the rental market after downpayment, all fees, fix-up costs etc, you'd better be netting $3,000 per year MINIMUM.
I would not buy expecting any capital gain on the value. Too speculative. Operate it for cashflow and equity build.
That's the safe way to do it.
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