Owner-Occupied duplex in a competitive market

[turbotuli]

Hey all,
Long time reader, first time poster. I'm hoping you all can help me out! I'm currently looking to buy an owner occupied duplex as my first property. However, I'm finding that most places in my area (Eugene, OR) don't even hit the 1% rule (did this used to be 2%?) and do not cash flow with the 50% rule. I learned of both of these on BiggerPockets.com and before that I was aiming to come as close to living rent free as possible while budgeting for about 2 months rent for vacancy/repairs (based on the advice of a friend who owner-occupied).

2 bed/1 bath(each side) duplexes are currently selling for around 220k-240k. Typical rents are $700-850/mo. The rental market now would seem to fetch a higher price, but a lot of the tenants are family friends or long term, so rented below market.

Taxes are about $2700-$3200/yr

My current rent is $875/mo (for a 3 bed duplex, rented below market. I only need 2 bedrooms). Taking into account my current rent and 20% down, a typical duplex I'm calculating my cash on cash at about 12%. Again this sounds less than ideal.

The other large obstacle I'm up against is the fact that I'm getting laid off at the end of Sept, so I need to move now while I can still get financing. I don't want to start with a bad deal though and maybe the market is just too hot.

Ideally I'd find a fixer upper and spend a couple of months working on it post layoff, but those deals seem to be few and far between. I am fairly handy and would enjoy fixing a place up and giving it more "curb appeal".

Here's a spreadsheet I put together with 3 scenarios. Can you guys double check my numbers and let me know what you think? https://www.dropbox.com/s/y1862innnrl5x8j/Mortgage%20Calculator%20Comparison.xlsx?dl=0

1st scenario - Triplex, Pros - near my son's school/bike path, double car garage for bike storage and woodworking shop, best cash flow Cons - Needs a rehab loan for roof, possible water damage from said roof, needs exterior paint, electrical needs updating, single pane windows, and the main unit I'd live in has lathe and plaster, carpet/flooring needs replaced, and bathroom needs work, shared water ($75/mo), highest up front cost (25% down for triplex)

2nd - Typical duplex, Worst cash flow

3rd - Minor fixer upper duplex, Pros - lowest up front cost, better cash flow than typical, cons - not the best neighborhood, not ideal layout (all common walls shared).

Well, that was a mouthful. Any and all feedback is welcome! Thanks in advance.

[J Boogie]

I think it all depends on how much cash reserves you've got right now.  1st scenario is a clear winner if your current position is strong enough.

I'd offer that advice regardless of whether or not you're going to be unemployed soon - but it's especially relevant now.

If your cash position isn't strong right now, I'd put a bookmark in this idea.

[turbotuli]

Appreciate the feedback! I have $70k available now and have an $18k severance coming (after taxes).

I added some additional details about the triplex. On the surface I really like it, but I think there are too many unknowns. Needs a rehab loan for roof, possible water damage from said roof, needs exterior paint, electrical needs updating, single pane windows, and the main unit I'd live in has lathe and plaster, carpet/flooring needs replaced, and bathroom needs work. I'd enjoy doing the work, but don't want to bite off more than I can chew. Assuming a 60 day close for rehab loan I'm getting really close to my layoff at the end of Sept too.

[J Boogie]

That's pretty solid given a down payment of about $34,000 and most updates aren't urgent and can be done incrementally.

If the roof needs to be repaired for the bank to issue a mortgage, you might be able to negotiate with the seller to have them do it.  I've gone through a rehab loan process and it was a total pain in the ass (didn't end up buying the place though).

You'll be able to get all your updates done eventually - but you'll never be able to pick it up and move it to somewhere you'd rather be.  Location is the biggest factor I think, mainly because you'll be living in it.

[Evie]

Yeah, traditional numbers aren't generally going to work in a lot of high cost of living areas.  We bought a duplex in just such an area, and our only other competition were investors trying to stick to those rules. Their offers weren't even considered.  For us, we looked at the fact that our own rental situation would be difficult (we have pets), and we were going to likely have to buy anyway if we wanted to stay in the area, and the tax break was really helpful with our income.  For us the calculation was influenced by the taxes and what we would have to spend for a non rental property.  But we also aren't looking at it as a pure investment so much as a way to better afford where we want to live. 
 

[totoro]

I'm in a very HCOL area, higher than where you are, and we own a triplex. 

On biggerpockets you'll see the divide between cash flow and appreciation focussed investors.  I take no firm position on this as to which is better because I only know appreciation markets well. I also know people like arebelspy have done way better with cash flow while some investors in San Francisco and Hawaii have had their net balloon with appreciation on higher cost leveraged properties.

In our HCOL market our appreciation has been $300,000 on a $700,000 purchase price in 3.6 years.   We are now doing a mix of furnished shorter term and long term rentals and this means we are cash flow positive, but we still do not meet the 1% rule.   

If you are in an appreciation market it often pays to buy in the best area and the most home you can comfortably afford.   

Be careful when you budget because even if you are covering your costs your equity pay-down is treated as income.   You'll need to have the funds to pay your taxes if your property is just covering its expenses.

Also, the more expensive the area the lower the percent of house value you need for maintenance and repairs and costs overall monthly so don't use the 50% rule - cost it out. 

[turbotuli]

That's pretty solid given a down payment of about $34,000 and most updates aren't urgent and can be done incrementally.

If the roof needs to be repaired for the bank to issue a mortgage, you might be able to negotiate with the seller to have them do it.  I've gone through a rehab loan process and it was a total pain in the ass (didn't end up buying the place though).

You'll be able to get all your updates done eventually - but you'll never be able to pick it up and move it to somewhere you'd rather be.  Location is the biggest factor I think, mainly because you'll be living in it.

Unfortunately, the seller will not pay for any repairs. Care to expand on your rehab loan experience? My lender says conservatively 60 days to close, which right now puts my just before my layoff date. I wonder if that's realistic though.

There's one other wrinkle that may lead me to wanting to go with a non-conventional loan. However, I'd want to be able to cancel PMI once equity is high enough and refi may not be an option. As I understand it FHA loans require PMI for the life now. Not sure if non-conventional/non-FHA, rehab loans exist though. I'll talk with the lender tomorrow.

Location is high on my list of priorities since I bike everywhere. I'm currently 3 miles from my son's school and this place is 5, but it is right near a dedicated bike path which covers most of the distance. I haven't seen a single property listed in my current area or closer to his school in the past couple months and this is an even more desirable area, driving costs up. Additionally, the two car garage will enable me to start a business better post-layoff.

Evie and totoro(My Neighbor?): Thanks for the feedback on HCOL areas. I've come to the same conclusion in my further reading. The same rules don't really apply...

[J Boogie]

That's pretty solid given a down payment of about $34,000 and most updates aren't urgent and can be done incrementally.

If the roof needs to be repaired for the bank to issue a mortgage, you might be able to negotiate with the seller to have them do it.  I've gone through a rehab loan process and it was a total pain in the ass (didn't end up buying the place though).

You'll be able to get all your updates done eventually - but you'll never be able to pick it up and move it to somewhere you'd rather be.  Location is the biggest factor I think, mainly because you'll be living in it.

Unfortunately, the seller will not pay for any repairs. Care to expand on your rehab loan experience? My lender says conservatively 60 days to close, which right now puts my just before my layoff date. I wonder if that's realistic though.

There's one other wrinkle that may lead me to wanting to go with a non-conventional loan. However, I'd want to be able to cancel PMI once equity is high enough and refi may not be an option. As I understand it FHA loans require PMI for the life now. Not sure if non-conventional/non-FHA, rehab loans exist though. I'll talk with the lender tomorrow.

Location is high on my list of priorities since I bike everywhere. I'm currently 3 miles from my son's school and this place is 5, but it is right near a dedicated bike path which covers most of the distance. I haven't seen a single property listed in my current area or closer to his school in the past couple months and this is an even more desirable area, driving costs up. Additionally, the two car garage will enable me to start a business better post-layoff.

Evie and totoro(My Neighbor?): Thanks for the feedback on HCOL areas. I've come to the same conclusion in my further reading. The same rules don't really apply...

Sure - Here are some of the cons:

-Would have increased interest rate for entire loan by .25%

-Was difficult and time consuming finding contractors interested in bidding on it - you have to find at least 2.  It was a busy time of year and contractors had plenty of much more reliable potential jobs to bid on with less red tape involved in the process.  I couldn't help but find some of the bids were strangely high.  One bid was right on the money and the other two seemed to reflect the contractor's "Don't really want to do this, but I'll do it for $XX,XXX if no one else wants to" mentality.

-Your loan officer and his team better be on the ball.  There is a lot they can miss or drag their heels on.  My loan officer was not the most reliable.  I used a different loan officer when I went back to buy a different duplex.

I would avoid them if at all possible, I'd look for different loan options.  Homestyle or EZ Conventional might be more advantageous, I couldn't say as I haven't researched, but your 60 day timeline isn't looking good.

[longforastache]

I purchased a triplex using a FHA rehab loan and would not recommend it with your timeline.  Between my loan officer, a nit-picking FHA agent, and contractor unfamiliar with the FHA process, it took six months(!) to close.

It might work better if you could buy conventional and do the work after closing.  Outside of the electrical and maybe the roof, you wouldn't need any special skills if you wanted to do the work yourself.