Author Topic: Advice for a newby about whether to buy the duplex next door  (Read 2660 times)

TKLucky

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Advice for a newby about whether to buy the duplex next door
« on: January 26, 2014, 10:39:41 AM »
Hi everyone,

I'm a long time reader of MM's blog and a lurker on the forum. This is my first post, however.

I'm writing to ask for advice on a real estate investment opportunity that recently fell in my lap.

Here are the basic details:

There is a 1950's duplex next door to my house (which we own). The house is quite close on one side (not more than 20 feet from the south side of our house). For that past nine years, a lovely woman has rented the nearest duplex, but she is moving out and we've gotten word that the landlord (who is in his 80's) is planning to sell. We are quite close to a major University (less than 2 miles) and so it is likely that the next owner will rent to undergraduate students (it is even conceivable that they could tear it down to build mini-dorms).

After talking with the owner, he has offered to sell directly to us for $150K plus we pay closing costs. Both sides currently rent for $690, but we believe this is quite low for the area (rents could be at least $750, possibly higher). He has never had any trouble renting both units (in 27 years of ownership). We are in a nice, safe, central city neighborhood and rentals in our area tend to be well maintained and in demand. A home inspection (which we paid for last week) showed that the house is in move-in condition with only minor maintenance issues on the horizon.

I am working on my PhD and my husband is starting up a handyman business right now. We also have two young kids. We are not really looking to get into investment real estate, however, this opportunity seems like it might be worth jumping into (in addition to investment potential, we could also control who we allow to live next door to our house).

I have requested a bunch of the recommended books listed in the other forum topic from the library, but have not read any yet. I am really a newby, and wonder if any of you would mind weighing in on whether this is worth pursuing (I have very limited time and so do not want to waste a huge amount of time researching if someone here can tell me right off the bat to steer clear...)

In terms of financing, my husband and I would be relying on a family loan for the entire cost of the house (probably $155K) at 4-5%. We have already gotten the green light on taking out this loan from the family member in question, but again, don't want to jump into something that isn't a good idea.

Any thoughts or advice? I would be very grateful for some basic guidance.

Another Reader

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Re: Advice for a newby about whether to buy the duplex next door
« Reply #1 on: January 26, 2014, 10:54:31 AM »
What do the comparable sales say this property is worth?  At $150k and the current rents of $690, the GRM is about 9.1.  How does the GRM compare to what has sold in the area?

Before you do anything, read up on the 50 percent rule here and on Bigger Pockets.  Not knowing where you live, my guess from the price range is that it's a so-so deal.  However, it has a couple of good points for you as the buyer - you will self manage and your husband is a handyman.  Plus, the family loan looks to a little below market for an income property. 

Do your comparable sales and rent analysis.  I certainly would not reject the idea until you have that information.

Nords

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Re: Advice for a newby about whether to buy the duplex next door
« Reply #2 on: January 26, 2014, 01:15:38 PM »
In terms of financing, my husband and I would be relying on a family loan for the entire cost of the house (probably $155K) at 4-5%. We have already gotten the green light on taking out this loan from the family member in question, but again, don't want to jump into something that isn't a good idea.
Any thoughts or advice? I would be very grateful for some basic guidance.
How much of a good deal is this?  Are you hard-wired to be landlords, eager to learn something new, or merely reluctant to pass up a possible opportunity due to fear/ignorance?

Do you really want to be next door to your tenants?  Have a plan for the Sunday-night dramas or the "Oh, I'll just pop next door and talk to the landlord about this". 

Is the sale price a bargain at $150K?  You don't necessarily need an appraisal but you might want to check the tax assessment and Zillow for neighborhood comps.

If you're renting to college students then feel free to have their parents co-sign the lease for rent payments-- it's common in Houston when our daughter moved off-campus to an apartment complex owned by TIAA.  It's probably also smart to have move-in/move-out videos, inventory lists, and an eviction plan.  College students can be extraordinarily ignorant of what not to put down a kitchen sink disposal or how to clean or what appliance behavior might be a big problem.  They won't read your tenant notebook, either.

If you're near a military base (or the college has a military ROTC unit or Yellow Ribbon program) then consider a landlord listing on AHRN.com.

Keep good records of your cost basis (including closing costs) for depreciation and tax tracking. 

Newbie landlords occasionally attempt to depreciate the property's land, not just the house on it.  Don't do this.  (The IRS really hates it and may sign you up for the lifetime audit program.)  Your cost basis is going to have to value the structure separately from the land, whether that's done by you or a home-building contractor or an insurance company or an appraisal.  It might also be on your tax assessment.

This is a great opportunity to chat up the existing tenants, and your last chance to be friendly with them before you become "Snidely Whiplash".  You want to find out what nagging little problems are in the duplex (slow toilet flushes?  water pressure problems?  washing machine noises?  high heating or air-conditioning expenses?) and what peeves they have with the current landlord.  Do you and the tenants both have copies of the local government's landlord/tenant code?

If the current tenants are staying in the duplex after you close the sale, then figure out what you and the seller are doing about their security deposits.  You may also be obligated to pay interest on the tenant's security deposit (this varies with state laws).

We've contemplated lending to family members, and there are questions which can suck the commitment out of any good handshake deal.  You're probably within the IRS rules for the interest rate on the loan (http://apps.irs.gov/app/picklist/list/federalRates.html), but how long do you want the loan?  What do you want to do for payments, accelerated principal payment, early payoff, or late payments?  Who's going to do the 1098 reporting?  What's the lender's estate plan if they die (or divorce) with the loan still outstanding, and what happens if you/spouse die or divorce with the loan outstanding?

Rental properties are a great opportunity for child labor, but if you're going to deduct their wages on Schedule E or contribute to their Roth IRAs then you'll want to know local labor laws, comply with local/state tax rules/paperwork, and keep squeaky-clean records.

_JT

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Re: Advice for a newby about whether to buy the duplex next door
« Reply #3 on: January 26, 2014, 05:03:21 PM »
It's a 1% property, which is good in some areas and marginal in lots of areas. Without knowing your market it's impossible to determine whether it's a good deal for you. If I were you, I think I'd be interested in it, if only because your husband can do the maintenance and you can control who your neighbors are.