Building A Duplex Does Not Allow A Lot Of Cash Flow. Any Thoughts?
I am looking at buildin a duplex. Each unit will have 1450 sq feet. The land and duplex will cost me about 185,000. The town is growing quickly and the city has made it difficult for anyone else to get approval for multi-family zoning. I hope to get 800 a month for each unit and with the tax savings, I will be able to make it cash flow. Hoping the town grows and duplex appreciates. Am I being overly optimistic?
Any thoughts from anyone who has built or bought a new duplex would be helpful regarding what kind of cash flow is acceptable.
If it does not cashflow the way you want it from the start, then in general it is a bad idea. It might be better to sell to a builder, or build a SFR and sell retail. You cannot count on appreciation. The market is cyclical. It can go up and it can go down.
You need to look at several items.
1) Comparable rents
2) Rental Market (demand for rentals)
3) Comparable duplexes
4) Appreciation in your area
Depending upon what your loan will be after construction, you may be close to break even (pre-tax). I guess my first question is, "Can you buy a duplex locally and have it cash flow?".
The town I want to build in has 500 people right now. The 2009 projection is 6000. It is about 10 minutes from Kansas City. Due to the fact that other little towns have allowed tons of Duplexes over the last 5 years, this town has set very strict zoning laws. The sub. I want to build this in is being developed by a very savvy RE. It is 97% residential and will have a total of 5 duplexes. There are three now. One sold last month for 205,000 (appr. 240,000) and one was just built. The builder has about 237,000 in the duplex. They are getting between 825 and 900. I can buy two bed duplex's in other towns for 169,000 renting for 725 a month. However, in these towns there are literally 100 duplexes within three blocks of each other. I am reasoning that I would get better tenants in a small town where the duplex is actually in a nice residential neighborhood. I have good credit and can lock in the loan for 5.25 for 20 years. With taxes and the mortgage and insurance I would be at about break even if I could get 800 rent. I would also get close to 4,000 back at tax time. I guess I would rather have new properties with low maint. rather than make a couple of hundred dollars a month on prop. that will need maint. and is located around a lot of other rental prop. This will be my first rental, so feel free to tell me I am missing the big picture. Any suggestions or criticisms welcomed.
If you are going to be building an RE portfolio of buy (or build) and hold, you will be cash limited very soon if you do not have pre-tax positive cash flow.
I, personally do not buy anything that is not pre-tax positive.
If you are looking to hold it for a short time and turn it, then your negative may be acceptable, except you are banking on early appreciation or acquiring with a profit at the front end.
buying and holding for appreciation is risky and you can not project your profit accurately. i want more control over my risk.........km
If I am building, what is the longest I should take a loan out? 20 or 30?
Duplexs are fit best for buyers who cannot afford a single family house, but don't want to or can't put up with being a land lord of am multi family. Because of one rent, its tough to get cashflow off of the property if you were to be an owner occupant, or to hold it as an investment, the return won't be that well.
You MAY want to consider a condo conversion. Sell each unit as a condo, take your profit, and reinvest in somthing that will give you cash flow, i.e 3-9 family.
Foster1,
From your posts I can't tell exactly what your plans are other than you expect property values to increase through 2009.
Most likely you will not hold the property for 20 or 30 years and even if you do, you will likely refinance much earlier. Your cash flow will likely be better with a 30 year loan. I ran some numbers for you on a $100,000 loan assuming a 20 year loan at 5.5 %and a 30 year loan at 6.0 %. The monthly on the 20 year is $687.89 and for the 30 year is $599.55. If you sell or re-fi at the end of 7 years, the loan balance is $76,554.04 for the 20 year loan and 89,639.44 for the 30 year loan.
You can scale these numbers to your loan amount and select your preference. Since these are not the actual rates you may be offered, you might want to re-calculate, but this should give you some idea what your choices are.
I would try to sell the units as fee simple towm homes, if they are suitable for the neiborhood.