Before we dive into numbers, cap rates, GRM's etc it's important to make sure you are in the correct Duplex Mindset. What does that mean? Read on.
Most people buy a duplex for one reason: To make money. Full Stop - end of story. It might be in the form cashflow, or tax advantages, or renting one half out to offset your mortgage, or capital appreciation (or hopefully all of the above) but it's about making money. You are not buying a home - you are purchasing a small business. The duplex mindset is about seeing your investment in a multifamily property the same way you would see an investment in any other business, and your main goals are to increase revenue and reduce expenses.
Turn off HGTV.
Every dollar you put into your duplex needs to come back to you and bring some friends back with it. That's how business works. One of the biggest mistakes a new investor can make is over-investing in the finish out of a duplex. Those HGTV remodel shows are fun to watch , but be careful because they can cost you. New investors tend to project their own desires into the duplex and are excited to start picking out colors and appliances to make this the BEST duplex on the block. They forget that if the market rent for a clean, modern duplex is $1200 and they spend thousands of dollars to create an "open concept" floor plan and a farmhouse modern kitchen it will probably still rent for about $1200. And now they have to recapture all that money. There's a good chance they needlessly just wasted their first 3 years' worth of cashflow. Remember - this is a business, not a personal residence.
"But wait," the new investor says. "What about capital appreciation? I'll make a lot more when I sell it!" Duplexes typically sell based on one thing: How much net income they make. Investors don't care about pretty countertops and shiplap. When you go to sell your duplex the potential buyer is going to look at the rent rolls, your Schedule E and the leases. They may not even set foot in the property. So by spending money on needless improvements the new investor may actually hurt their property's resale value because they inadvertently lowered the net income.
That said, your new business does need to look good and create a good first impression. Fresh paint, a bright clean kitchen, a manicured lawn and a new bead of white caulk in the showers will help you rent your duplex at market value. Those are things that can be done for very little cost and they will get you the biggest bang for the buck. If you are a long-term investor you may consider a few upgrades that save you money in the long run. For instance if the duplex has carpet it could be worth it to put down tile floors. Over the life of the property you will probably make that money back several times over by not having to clean and replace carpet after each tenant. If you pay the water bill consider adding xeriscaping, low-flow shower heads and toilets. But again, this is only if you plan on holding the property long term because it will take years to realize all the benefits.
Your Standards are not the Tenant's Standards
Chances are your first duplex is going to be a little below the standard at which you are used to living. The Duplex Mindset means you look at duplexes as the prospective tenant, not as yourself. The prospective tenant might be moving up in the world and is excited to be in a duplex this nice even if you think it's kind of basic. Or they might be moving out of their parents' house for the first time and anything with four walls and a roof that is their own space will make them happy. It could be any number of situations, but in all likelihood it will not resemble your living situation at all. Keep that in mind as you decide what kind of duplex to buy and what upgrades to make to it.
Some new investors will be so excited to get into their first property that they'll assume some things they shouldn't. They'll see a vacant rental in the same neighborhood for $1500/month and assume that's what they'll be able to get. They'll assume that the insurance premium will be about the same as their primary residence. They'll assume that tenants won't change the oil in their motorcycle in the living room. All these assumptions could easily be wrong. Assume nothing, and be sure when you're evaluating a duplex for purchase that you are using real world numbers even if you're excited about the duplex and are convinced it's the one for you. This is where a professional broker who specializes in multi-family properties can be invaluable. Lean on them to help you find out those real numbers and decide if this is indeed the perfect duplex for your portfolio, or a potential mistake.
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