Author Topic: Help me decide to purchase a duplex....  (Read 4044 times)

PAstash

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Help me decide to purchase a duplex....
« on: June 11, 2016, 01:46:35 PM »
I know some people say they hate their job. However, mine is dangerous + it is at times morally/ethically questionable. It has bothered me enough to pursue financial independence and to pursue another career (land lording). I also want the cash flow for hopefully ER one day.

Now some information about myself, I am in my 30s and gainfully employed. I make 70kish dollars a year with unlimited overtime. I live in the best neighborhood in a 60ish mile radius. I’ve purchased 1 home and now a duplex has come up for sell next door to me. That's the purpose of this post. The following are personal financials to help you make a better decision. Skip down if you want to get to the meat and potatoes.
•   My net worth $23,795 not including house #1
•   41k mortgage on house #1 mortgage is $650.00 month 10 year
•   $0 other debt
•   10k cash
•   52k 457 plan
•   5k spilt between taxable account and Roth
•   Monthly bills utilities + mortgage is $1095.00
•   Car is paid for with 90k miles, reliable, and maintenance is done on it.

House #1
It is currently being lived in and could easily rent for 900$ monthly.
This place will need 2-3.5k worth more of renovations but it can wait awhile before it would become any form of an issue.
So I purchased a 2-3bed 1 bath with a nice flat yard with 3 parking spaces house for 59k put 15k into it. Due to the high quality neighborhood and school district (think best in 60-mile radius). The same realty agent who sold it to me told me she would put it back on the market for 100-120k depending on the speed I wished to sell it after she saw the renovations.
This house was purchased with it being a rental in mind. Now I have this opportunity on the duplex next door. Our parking lots touch and so do the yards with a small fence between.
House #2
Interest rate :3.750%-4.750%
I want an owner occupied mortgage. However, I have one on my first house and am wondering if that will be a conflict with me moving to the new address?
5% down 5450.00$
0$ for improvements!
Budgeting 500$ for inspection (should be less) and 3500$ for closing could be slightly less also.
Per-unit market rent: Unit 1 is renting for 650$, unit two is renting for 425$ for this place in this neighborhood this is drastically under rented! I could see as much as a 300$ increase on unit 1 and a 100$ increases on unit 2.
Vacancy/Loss Rate: going with 5% This area is in extreme high demand due to the lack of housing and the quality of the neighborhood and school.
Property Taxes: 1,325.00 $ per year
Insurance: about 900$ a year
Maintenance and Repairs: going with 1000.00$ per year. I doubt it will be this high due to condition.
Property Management: managing it myself due to it being next door to me. Paying myself 10%
Water and gas: I pay 50$ on each so 1200.00$ a year anything over 50.00$ per month the tenant pays.
Lawn Care: my yard literally connects with this place next door. So it will just add 20-30min cutting time for me. just writing it off as yard work.
putting it together: shooting for 107k purchase price. +5950.00$ inspection & closing
total :112950.00$
1075.00$x12=12,900rentx.09=11,610.00estimated vacancyx12=139,320/112950.00=1.233 nice?!
My concerns: We want another home eventually sadly the distance from our jobs and of family kind of locks us into this neighborhood + this is where we want kids to go to school think five-year plan. However, I have serious concerns for the lack of diversification. With house 1 and 2 being valued at over 200k that is a very large chunk of my portfolio to be locked into real estate in one neighborhood.
So with our retirement home being located in the same neighborhood I’ve got serious concerns in the long term with having 400k+ being locked in real estate in one neighborhood.
We could sell something at the time but then lose the cash flow and it's what I am really after.
Home 1# could be sold easily home #2 not so much it being a duplex and I am always looking to have another way out.
Thing that make me happy: it's all located in one place, I love the area and believe it to be a good investment.

Your thoughts?
Is house #2 a good idea?

tarheeldan

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Re: Help me decide to purchase a duplex....
« Reply #1 on: June 11, 2016, 04:21:18 PM »
I'm not knowledgeable in the landlord department so I'll leave that to others - but I noticed the option of sell house 1 and live in half of house 2 didn't come up. That could limit your specific (location) risk you mentioned.

Cyaphas

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Re: Help me decide to purchase a duplex....
« Reply #2 on: June 11, 2016, 07:08:30 PM »
1. Put enough down to not have to pay PMI.

2. If you're paying more than 75 * a months rent to purchase an investment home, you're probably paying too much. Don't be optimistic with a single one of your numbers when you're doing estimates.

3. I think it's a great idea to buy rentals nearby your home. Like MMM with his commuting numbers, I think your proximity to the rental for repairs or any other reason you may need to drive there has a big impact on profit. That and the psychological benefits of being able to see a major asset of yours is pretty rewarding.

4. Get help. With a couple of calls it wouldn't be hard to find a local real estate investor to throw questions at. In my experience they're more than happy to help. Obviously don't give them the address or even the area you're thinking about purchasing, this person may be competition. You could also call a local property management company, usually a division of a local real estate office and ask them some questions. You don't have to use them, but you can use them for the fountain of information they have.

5. Make sure the HVAC, roof and foundation are in good working order. These can be investment killers.

6. Make sure you have the stomach for this. Landlording can really suck.

PAstash

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Re: Help me decide to purchase a duplex....
« Reply #3 on: June 11, 2016, 09:40:38 PM »
1. Put enough down to not have to pay PMI.

2. If you're paying more than 75 * a months rent to purchase an investment home, you're probably paying too much. Don't be optimistic with a single one of your numbers when you're doing estimates.

3. I think it's a great idea to buy rentals nearby your home. Like MMM with his commuting numbers, I think your proximity to the rental for repairs or any other reason you may need to drive there has a big impact on profit. That and the psychological benefits of being able to see a major asset of yours is pretty rewarding.

4. Get help. With a couple of calls it wouldn't be hard to find a local real estate investor to throw questions at. In my experience they're more than happy to help. Obviously don't give them the address or even the area you're thinking about purchasing, this person may be competition. You could also call a local property management company, usually a division of a local real estate office and ask them some questions. You don't have to use them, but you can use them for the fountain of information they have.

5. Make sure the HVAC, roof and foundation are in good working order. These can be investment killers.

6. Make sure you have the stomach for this. Landlording can really suck.

can you elaborate on number 2? I don't follow.

Cyaphas

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Re: Help me decide to purchase a duplex....
« Reply #4 on: June 12, 2016, 11:29:37 AM »
1. Put enough down to not have to pay PMI.

2. If you're paying more than 75 * a months rent to purchase an investment home, you're probably paying too much. Don't be optimistic with a single one of your numbers when you're doing estimates.

3. I think it's a great idea to buy rentals nearby your home. Like MMM with his commuting numbers, I think your proximity to the rental for repairs or any other reason you may need to drive there has a big impact on profit. That and the psychological benefits of being able to see a major asset of yours is pretty rewarding.

4. Get help. With a couple of calls it wouldn't be hard to find a local real estate investor to throw questions at. In my experience they're more than happy to help. Obviously don't give them the address or even the area you're thinking about purchasing, this person may be competition. You could also call a local property management company, usually a division of a local real estate office and ask them some questions. You don't have to use them, but you can use them for the fountain of information they have.

5. Make sure the HVAC, roof and foundation are in good working order. These can be investment killers.

6. Make sure you have the stomach for this. Landlording can really suck.

can you elaborate on number 2? I don't follow.


A rental that brings in $1000 per month in revenue shouldn't cost more than $75,000. A duplex that brings in $2000 per month shouldn't cost more than $150k to purchase. It was a general rule one of my teachers threw out there in my real estate classes. He's a local landlord and Real Estate Broker.

As for when you run your numbers, try to assume you're going to miss a months rent per year. When you figure out the property insurance round up. When you're estimating repairs, throw in $50 a month extra. Make sure the numbers work for you, don't alter them until they work for you. You don't want to get into something like this and be barely making money. If the numbers don't match up, let it be someone else's folly. Don't be afraid to put in an offer 10% below asking. Investment properties are different than 'homes' that people throw premiums on. This is money in, money out. You can adjust the 75 rule up to 80 or even 85 times rent account of the rental's location advantage to you, but that's up to you.

PAstash

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Re: Help me decide to purchase a duplex....
« Reply #5 on: June 12, 2016, 08:58:39 PM »
1. Put enough down to not have to pay PMI.

2. If you're paying more than 75 * a months rent to purchase an investment home, you're probably paying too much. Don't be optimistic with a single one of your numbers when you're doing estimates.

3. I think it's a great idea to buy rentals nearby your home. Like MMM with his commuting numbers, I think your proximity to the rental for repairs or any other reason you may need to drive there has a big impact on profit. That and the psychological benefits of being able to see a major asset of yours is pretty rewarding.

4. Get help. With a couple of calls it wouldn't be hard to find a local real estate investor to throw questions at. In my experience they're more than happy to help. Obviously don't give them the address or even the area you're thinking about purchasing, this person may be competition. You could also call a local property management company, usually a division of a local real estate office and ask them some questions. You don't have to use them, but you can use them for the fountain of information they have.

5. Make sure the HVAC, roof and foundation are in good working order. These can be investment killers.

6. Make sure you have the stomach for this. Landlording can really suck.

can you elaborate on number 2? I don't follow.


A rental that brings in $1000 per month in revenue shouldn't cost more than $75,000. A duplex that brings in $2000 per month shouldn't cost more than $150k to purchase. It was a general rule one of my teachers threw out there in my real estate classes. He's a local landlord and Real Estate Broker.

As for when you run your numbers, try to assume you're going to miss a months rent per year. When you figure out the property insurance round up. When you're estimating repairs, throw in $50 a month extra. Make sure the numbers work for you, don't alter them until they work for you. You don't want to get into something like this and be barely making money. If the numbers don't match up, let it be someone else's folly. Don't be afraid to put in an offer 10% below asking. Investment properties are different than 'homes' that people throw premiums on. This is money in, money out. You can adjust the 75 rule up to 80 or even 85 times rent account of the rental's location advantage to you, but that's up to you.

Hey I actually got a chance to go see it today. This is the first time since the renovations have been done. from what I can tell it looks great and corners appear to have not been cut. your 75k for 1k a month rent is for worrisome to me! Current numbers are 700$ month for top unit 475$ bottom. The bottom is 1/4 the size of the top. According to current landlord she has a list of people waiting for that top unit. It does look... REALLY good. Being that it literally connects to my property I really wana take a shot at it due to neighborhood quality + quality of tenant. However this rule of thumb you threw out clearly doesn't cut it for me.

On the good side. The seller is currently going through a divorce.  I have this on extremely good authority that they REALLY want to move the property. How much would you consider offering? I was thinking 95k? they currently have it listed for 109,900. Sadly even if I cash out my taxable stock account I'd be sitting on 12.5-15k that's not enough for the 20% down to avoid PMI also in the state of PA I hear for investment properties it needs to be 25% down to avoid PMI. Can you give me any advice on financing?

Also as for land lording being sucky. My normal 9-5 job is extremely high stress. Very dangerous. It's also Morally ambiguous. I really need a out. I doubt land lording could be any worse.

Socmonkey

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Re: Help me decide to purchase a duplex....
« Reply #6 on: June 13, 2016, 10:34:29 AM »
I make approximately the same as you, and pay about the same on my mortgage as well. I would jump on this opportunity (Of course talk down the price).

You might want to take a home equity line of credit on your current home since you have fixed it up and now it is worth more.  Other ways to finance are any hard money lenders in your area. Possibly a local real estate investors group would have knowledge on who to speak with.

You make enough from just your job to pay off any 15k loan in about 6 months.

You can move into the duplex to do an owner occupant mortgage, and then live there for at least the term specified. 

J Boogie

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Re: Help me decide to purchase a duplex....
« Reply #7 on: June 13, 2016, 11:02:36 AM »
1. Put enough down to not have to pay PMI.

2. If you're paying more than 75 * a months rent to purchase an investment home, you're probably paying too much. Don't be optimistic with a single one of your numbers when you're doing estimates.

3. I think it's a great idea to buy rentals nearby your home. Like MMM with his commuting numbers, I think your proximity to the rental for repairs or any other reason you may need to drive there has a big impact on profit. That and the psychological benefits of being able to see a major asset of yours is pretty rewarding.

4. Get help. With a couple of calls it wouldn't be hard to find a local real estate investor to throw questions at. In my experience they're more than happy to help. Obviously don't give them the address or even the area you're thinking about purchasing, this person may be competition. You could also call a local property management company, usually a division of a local real estate office and ask them some questions. You don't have to use them, but you can use them for the fountain of information they have.

5. Make sure the HVAC, roof and foundation are in good working order. These can be investment killers.

6. Make sure you have the stomach for this. Landlording can really suck.

can you elaborate on number 2? I don't follow.


A duplex that brings in $2000 per month shouldn't cost more than $150k to purchase. It was a general rule one of my teachers threw out there in my real estate classes. He's a local landlord and Real Estate Broker.



It probably goes without saying, but it's worth adding that the numbers don't need to be that attractive for you to do well as an owner occupant.  Evaluating your personal residence is a little different.  I can only speak for myself, but I would not want my family to live in a rental in my area (Twin Cities, pretty average COL) that meets rule #2. 


Cyaphas

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Re: Help me decide to purchase a duplex....
« Reply #8 on: June 13, 2016, 04:03:34 PM »
95,000 / 1175 = 80.85


You're not way off of those numbers. It's not a bad deal and given it's proximity to you, I'd pursue it with an offer. Try to bring the sale price down, to reduce the taxes, I usually offer to pay closing costs or even realtor fees and make a much lower offer. That way when your taxes are assessed you can show proof of purchase, which is market value.

The vast majority of people don't realize when the seller covers closing costs and realtor fees, the buyer is paying property taxes on those for as long as they own the house.

As for avoiding PMI. Does your 457 plan allow for loans to yourself? I'm not familiar with them at all.




JrDoctor

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Re: Help me decide to purchase a duplex....
« Reply #9 on: June 14, 2016, 12:22:37 AM »
Rental property next to you is ideal for reducing the amount of work, risk and commuting involved in landlording.

PAstash

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Re: Help me decide to purchase a duplex....
« Reply #10 on: June 14, 2016, 03:16:20 PM »
95,000 / 1175 = 80.85


You're not way off of those numbers. It's not a bad deal and given it's proximity to you, I'd pursue it with an offer. Try to bring the sale price down, to reduce the taxes, I usually offer to pay closing costs or even realtor fees and make a much lower offer. That way when your taxes are assessed you can show proof of purchase, which is market value.

The vast majority of people don't realize when the seller covers closing costs and realtor fees, the buyer is paying property taxes on those for as long as they own the house.

As for avoiding PMI. Does your 457 plan allow for loans to yourself? I'm not familiar with them at all.

the 457 plan does not.

Could you elaborate more on the fees bit. explain like i am 5 please?

PAstash

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Re: Help me decide to purchase a duplex....
« Reply #11 on: June 14, 2016, 03:20:41 PM »
95,000 / 1175 = 80.85


You're not way off of those numbers. It's not a bad deal and given it's proximity to you, I'd pursue it with an offer. Try to bring the sale price down, to reduce the taxes, I usually offer to pay closing costs or even realtor fees and make a much lower offer. That way when your taxes are assessed you can show proof of purchase, which is market value.

The vast majority of people don't realize when the seller covers closing costs and realtor fees, the buyer is paying property taxes on those for as long as they own the house.

As for avoiding PMI. Does your 457 plan allow for loans to yourself? I'm not familiar with them at all.

second response. The problem is i am a bit cash poor right now. but don't want to pass this up. i could come up with maybe 12.5-15k so paying fees ect closing costs is going to hurt me.

TrMama

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Re: Help me decide to purchase a duplex....
« Reply #12 on: June 14, 2016, 05:29:25 PM »
Is there any chance of this neighbourhood becoming more dense? In the part of the world where our rental is located, 2 adjoining properties are worth much more together than the sum of their values if sold separately. This is because it gives developers enough land to put in an apartment block.

What is required in order for you to raise the rent on the under market value unit? Can you just raise the rent when the lease is up? Can you kick them out when you buy the place? This is important info you need to know before you become a landlord.

PAstash

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Re: Help me decide to purchase a duplex....
« Reply #13 on: June 15, 2016, 01:43:16 PM »
Is there any chance of this neighbourhood becoming more dense? In the part of the world where our rental is located, 2 adjoining properties are worth much more together than the sum of their values if sold separately. This is because it gives developers enough land to put in an apartment block.

What is required in order for you to raise the rent on the under market value unit? Can you just raise the rent when the lease is up? Can you kick them out when you buy the place? This is important info you need to know before you become a landlord.

On the neighborhood being more dense...: not likely in the near future. It is semi rural with major cities in two directions approx 40 miles away in each direction north and south respectively. The appeal is that it is the best school district within 40-60 miles. Think middle upper to upper lower class. It would be on the cusp of being considered monied for the area that it is in. White/christian small business adjacent to a major highway which connects the two major cities. Far enough that the urban sprawl has yet to hit it. With easy enough highway access to stay relevant. 

combined with several small businesses a semi tight community. The surrounding middle/lower income want to move here but it's a struggle to get the money to buy a place and no new houses being developed+ schools has inflated the housing market. The area could expand. It could absolutely blow up. I don't think i'd see it inside of 10 years tho.

On the under value of the rents...: house #1 the single family i am living in should go for 850-1100$(current mortage 650$/mo 10 yr). house #2 the duplex is under rented. The previous landlord agreed to have the new owner not up the rents on the tenant for the duration of their lease on the downstairs smaller unit we will call it unit 1. Which would be 1 year. Unit 2 is currently on a month to month lease as the tenant has been looking to purchase a home in this neighborhood (small family wife husband infant small dog) for the above reasons. According to the lease for #2 i would need to provide 26 days notice prior to asking them to leave or they would need to provide the same to me. Same for raising rent. They (the tenants from unit #2) have a verbal agreement (not written) that the current and future landlord (me) will not raise the rent prior to 1 year. I have a feeling they don't plan on being there that long.

back to unit #1 downstairs. It's just too small. I couldn't possible justify renting it for more then 500$ monthly. It has been full renovated. everything considered it would be a nice small office space which a few years down the road i may use it for that exact thing. However it's currently remolded into a efficiency apartment. literally 3 rooms. living room/kitchen combined  bed bath one closet almost walkinish.


sun and sand

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Re: Help me decide to purchase a duplex....
« Reply #14 on: June 15, 2016, 09:07:00 PM »
I bought a SFH next to my primary residence once. TOO CLOSE.  Will never do it again.  People knew I owned the property and I got snide comments and calls from neighbours about dogs etc. in the rental.  I sold the house because it was too uncomfortable. My duplex is in the same city, but not too close. It's great.   
I would not worry about being a landlord.  I have had a few tough years. But overall I say to myself, 'what other job would pay me this for a few hours per week?'

PAstash

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Re: Help me decide to purchase a duplex....
« Reply #15 on: June 16, 2016, 12:02:58 PM »
I bought a SFH next to my primary residence once. TOO CLOSE.  Will never do it again.  People knew I owned the property and I got snide comments and calls from neighbours about dogs etc. in the rental.  I sold the house because it was too uncomfortable. My duplex is in the same city, but not too close. It's great.   
I would not worry about being a landlord.  I have had a few tough years. But overall I say to myself, 'what other job would pay me this for a few hours per week?'

Yea rock on i am looking forward to getting into this. just playing financing to close the deal. So about it being to close. We are not planning to stay here very long. Cause the one we are living in will be a rental also. So basically here long enough to save up our down payment and find our retirement home.

Cyaphas

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Re: Help me decide to purchase a duplex....
« Reply #16 on: June 16, 2016, 02:21:50 PM »

the 457 plan does not.

Could you elaborate more on the fees bit?

A house is listed for $110,000.

-------------------------------

Offer A:
Sale price:                                                                           $100,000
Seller covers: 3% to selling agent and 3% to buyer's agent   -$6,000
Seller covers closing costs with title company                         -$1,300
Seller buys a Home Warranty for 1 year                                 -$1,200
Seller take home                                                                    $91,500


Buyer will pay property taxes on $100,000. Because that's what the house sold as.

----------------------

Offer B:
Sale Price:                                                                               $92,000
Buyer covers, closing costs Realtor commissions and doesn't buy a home warranty.
Seller take home                                                                     $92,000

Buyer will pay property taxes on $92,000. Because that's what the house sold for. In my area property taxes are 2.4%. So, the first year that's $192. Which doesn't seem like much, but they can only raise your taxes so often and so high. You also save $480 in realtor fees. Usually home warranties are BS. I'm not going to get too deep into those. If you're going to use one, find one you know that's local and has good reviews.

---------------------


Same house. Two different offers. Seller walks away with more money on the second offer and the Buyer saves a lot of money on his taxes for however long he owns the houses. Also, the realtor commissions go down in cost because of the sale price going down on the second offer.

PAstash

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Re: Help me decide to purchase a duplex....
« Reply #17 on: June 17, 2016, 10:35:26 AM »

the 457 plan does not.

Could you elaborate more on the fees bit?

A house is listed for $110,000.

-------------------------------

Offer A:
Sale price:                                                                           $100,000
Seller covers: 3% to selling agent and 3% to buyer's agent   -$6,000
Seller covers closing costs with title company                         -$1,300
Seller buys a Home Warranty for 1 year                                 -$1,200
Seller take home                                                                    $91,500


Buyer will pay property taxes on $100,000. Because that's what the house sold as.

----------------------

Offer B:
Sale Price:                                                                               $92,000
Buyer covers, closing costs Realtor commissions and doesn't buy a home warranty.
Seller take home                                                                     $92,000

Buyer will pay property taxes on $92,000. Because that's what the house sold for. In my area property taxes are 2.4%. So, the first year that's $192. Which doesn't seem like much, but they can only raise your taxes so often and so high. You also save $480 in realtor fees. Usually home warranties are BS. I'm not going to get too deep into those. If you're going to use one, find one you know that's local and has good reviews.

---------------------


Same house. Two different offers. Seller walks away with more money on the second offer and the Buyer saves a lot of money on his taxes for however long he owns the houses. Also, the realtor commissions go down in cost because of the sale price going down on the second offer.

This is great! thank you!

The problem is that i'll barely be able to come up with down payment and closing (because i wasn't planning for this) Idon't think this is viable strategy for me right now. However i think in the future i could use it.

JumpInTheFIRE

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Re: Help me decide to purchase a duplex....
« Reply #18 on: June 20, 2016, 06:50:42 PM »
Keep in mind that Cyaphas' example used his tax rate and he's from Texas.  Texas has some of the highest property taxes in the nation (due to no state income tax) and his quoted tax rate appears to be higher than the Texas state average, the tax rate in your locality might be lower and you wouldn't save as much.  Also, in many places the tax rate is based on a county assessment rather than a sales price, they may differ.  In the example, you paid $8500 out of pocket and and saved $192/year, so it will take 44 years at that rate to break even on the strategy.  That also ignores the opportunity cost of using that money for this tax avoidance strategy instead of investing it and the possible depressed sale price if you sell the property.  As with anything on these boards, do your own analysis with your own numbers and situation to see if the strategy will work for you.

Cyaphas

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Re: Help me decide to purchase a duplex....
« Reply #19 on: June 20, 2016, 06:58:43 PM »
Keep in mind that Cyaphas' example used his tax rate and he's from Texas.  Texas has some of the highest property taxes in the nation (due to no state income tax) and his quoted tax rate appears to be higher than the Texas state average, the tax rate in your locality might be lower and you wouldn't save as much.  Also, in many places the tax rate is based on a county assessment rather than a sales price, they may differ.  In the example, you paid $8500 out of pocket and and saved $192/year, so it will take 44 years at that rate to break even on the strategy.  That also ignores the opportunity cost of using that money for this tax avoidance strategy instead of investing it and the possible depressed sale price if you sell the property.  As with anything on these boards, do your own analysis with your own numbers and situation to see if the strategy will work for you.

You also save on the commission's. Which is a bit more. With the property tax you save every year. The commission's it's just a one time savings.