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Duplex Investment Update H1 2016

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Duplex investment updateIt’s been a long time since I gave an update on our small rental duplex. This house is a single family home that got converted to a duplex in the 80’s. The upstairs is a nice one bedroom apartment with a lot of natural light. The downstairs is a spacious one bedroom unit with an office/den. The house was built in 1895 and it is a pretty neat Victorian home. Being such an old home, there are a few issues.

Honestly, I’m not a very good rental property investor. I don’t know how to fix most things and I had to outsource a majority of the maintenance and repairs. I also don’t like to aggressively raise rent. The rental market in Portland has been very hot over the last few years and I probably should have raised rent more. The cash flow is slowly improving so that’s good news. Let’s do a quick recap, check the cash flow, and then I’ll tell you the good news.

*Here is something new – I’m going to give real estate crowdfunding a try this year. I opened an account at Realty Shares in January and invested $8,000 in a commercial property in Arizona. Check them out if you want to invest in real estate, but don’t want to be a landlord.

Disclaimer: We may receive a referral fee if you sign up with RealtyShares through the link above.

Quick Duplex Investment Recap

In 2014, we sold our 4-plex and rental home, and acquired a small duplex close to where we live currently. Our old rentals were about 40 minutes away and I didn’t have time to drive out there to manage them. This duplex is just 10 minutes away and it is on the way to RB40Jr’s preschool, so it is very convenient for me to drop by occasionally. The duplex is also in a much nicer area than the 4-plex. The tenants who can afford to rent here are more financially secure so they should be able to pay rent on time. I haven’t had problems with rent collection so far.

We also will need a bit more space when RB40jr gets older and we plan to relocate here in a few years. We can take over both units and perhaps rent the upstairs out on Airbnb when my mom isn’t here. My mom lives with us about 8 months out of the year. Lastly, using this home as a primary residence will help us reduce tax on the capital gain when we sell the place in 13 years. That’s the plan anyway.

Rental Cash Flow

The tenants have a great deal on their rent. The previous landlord did not raise rent annually so their rents were way below market value. The previous landlord also did not want to fix anything. It’s a trade off. Here is how the rent has changed since I took over.

Unit 2014 rent 2016 rent
Upstairs $820 $950
Downstairs $1,200 $1,450
Total $2,020 $2,400

 

I raised the rent for the upstairs tenant about $60/year over the last 2 years. The downstairs tenant was going through some difficult times so I kept the rent the same in 2015. Her partner got early onset Alzheimer’s and moved back home to the East Coast. This was a few months before I purchased the place. Going from a two-person to one-person household is a big hit to the budget. Anyway, she paid rent on time and she was a good tenant while she was here. She decided to try RV living full time and left in late 2015. We fixed up the unit and found new tenants very quickly. We painted the interior, ripped out the 30-year-old carpet, and put in new hardwood flooring. The unit is nice and I should have raised the rent more. Now, I think we could rent the downstairs unit for about $1,700.

The upstairs unit could probably rent out for $1,300 when we have a turnover. We’d have to do a lot of work on it, though. The unit is functional, but everything is a little worn out. When the current tenant moves out, we will need to paint, replace the carpet, replace the linoleum, put up new balcony railings, replace the floorboard heater, replace the hot water heater, to name a few. Mrs. RB40 would like to remodel the kitchen, but I don’t know if we’ll have the money for that right away. The tenant is great, though. I’d rather have him stay and keep the rent moderate. A trouble-free tenant is priceless.

Anyway, the rental income increased about 20% since we acquired the duplex and it has a lot of headroom to grow. It would be great to collect $3,000 in rent every month. We’ll get there someday.

2015 Result

The duplex did not do well in 2015. We lost $5,400 due to repairs and maintenance. The new hardwood flooring was the big expense last year.  For 2016, I think we will do a little better. We have about $3,000 positive cash flow after 6 months. However, we have some repairs coming up so we’ll see how it goes.

Good News

We haven’t done so well with the cash flow, but there is some good news. The housing market in Portland is red hot and the property value has increased substantially. There are only a few houses for sale in this area and I think that is driving the price up.

I got a surprise recently when I went by to clean the gutter, the house next door is on sale for $1,100,000! The house is bigger and the interior has been completely remodeled, but it is still 10 feet away. Another house across the street sold for $640,000 about 6 months ago and they are doing a complete top down remodel. They put in a new roof, poured new concrete basement walls, and are completely gutting the interior. I think this is a flip because I doubt a regular homeowner would do that much renovation. I wonder how much it would cost to redo the whole house like that, probably $250,000+ if you hire it out. We’ll see if I’m right in 4-5 months. The price tag would have to be over a million for it to be worth flipping. They have been working on it for quite a while already.

Anyway, it looks like our property value is increasing rapidly. We paid $560,000 for this home and now Zillow values it at $810,000. That’s a huge increase in just 2 years. Of course, you can’t rely on Zillow for the true value. It is just an estimate based on the surrounding properties. Our home is the cheapest house on the block and I’m sure we can’t sell it for $810,000 right now. It is gratifying to see the property value rise, though. On my net worth spreadsheet, I value the duplex at $650,000.

Slowly Improving

To wrap it up, the duplex investment is doing pretty well. We have great tenants and we should have positive cash flow this year. The rental income should slowly increase over the next few years as well. The increase in property value is nice, but it is not sustainable. I just hope we don’t have another huge crash when the party is over.

Investing in rental properties is a great way to build wealth, but it can be a lot of work. I can manage the properties now, but eventually, I want to travel and live in other parts of the world. We’ll probably sell all our properties when we are ready to retire full-time. Fortunately, there are other ways to invest in real estate if you don’t want to be a landlord. A portion of my retirement account is invested in VNQ, Vanguard REIT index. Crowdfunding real estate is also an interesting option. Here are some that I am considering. You need to be an accredited investor to participate, though.

  • Realty Shares – I just invested $8,000 with Realty Shares in early 2017. The projected ROI is 16.5% annually over 3 years. We’ll see if they can deliver.
  • Fundrise – Specialize in commercial real estate like apartment buildings and strip malls. (Fundrise is now open to unaccredited investor as well.)
  • Realty Mogul – Wide variety of offerings from office buildings to single family home flips.
  • Peerstreet – Invest in real estate loans.

Do you own a home or rental properties? How is your local real estate market doing?

Disclosure: We may receive a referral fee if you sign up with a crowdfunding company though the links above.

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{ 46 comments… add one }
  • Believe Fire June 20, 2016, 4:30 am

    Nice appreciation in your market, RB40! Glad to see your cash flow is looking better too. We don’t own any properties and don’t have a market to speak of because of our travels. That said, we want to be real estate investors someday.

    • retirebyforty June 20, 2016, 10:26 am

      Thanks. It’s amazing how much the price has increased. Portland is hot these days. You can always get a property manager if you can’t manage the place yourself.

  • The Green Swan June 20, 2016, 4:49 am

    Slow and steady increases on the rent makes sense, I think you’ve done well with that and sounds like you’ve benefitted from steady occupancy. Sometimes you just have to bite the bullet on the large maintenance and repairs, but it should pay off over time. Great plan to avoid the capital gains tax too!

    And that’s awesome news about the recent sales nearby, you must be in a great location.

    • retirebyforty June 20, 2016, 10:28 am

      We are in a very good location. Just a couple of blocks away from the really prime location. It’s a nice neighborhood overall. I value good tenants over a little more rent. Troublesome tenants can make you want to quit being a landlord.

  • Apathy Ends June 20, 2016, 4:49 am

    The MN property market is also on fire right now. Record lows for available houses and the prices are real high

    The only real estate investing I have done is a REIT with a DRIP for the dividend. It hasn’t performed all the great since I have owned it but I am going to hold onto it for the long haul

    • retirebyforty June 20, 2016, 10:29 am

      Really? That’s great. REIT is a good way to go. I think that is a great alternative to owning your own rentals.

      • Tanya July 6, 2016, 11:29 pm

        I have owned REIT’s and currently own some rentals. I don’t like REIT’s because they seem to pay small dividends. Upkeep seems to eat up a lot of their returns. I got better returns on regular equities. Just sharing my experience.

  • Eric Bowlin June 20, 2016, 4:56 am

    Interesting article! Personally, I would never buy an investment property that doesn’t cash-flow day 1…. I’ve read a ton of articles about the massive appreciation in your market. The 50%+ appreciation might have been enough to entice me into buying something a few years ago if I could have predicted it!

    • retirebyforty June 20, 2016, 10:30 am

      Our place cash-flow from day 1 … if you don’t count the repair and maintenance… Once we have the big ticket items out of the way, the maintenance shouldn’t be so expensive. I’m hopeful…

  • Pia @ Mama Hustle June 20, 2016, 4:57 am

    Sounds like you’re on a great record to make a profit on the property long-term. I’m curious – why manage yourself instead of hiring a property manager?

    • mary w June 20, 2016, 10:23 am

      Not Joe (obviously) but…property managers usually cost 10% of gross rents. That 10% can take a property from being cash flow positive to negative. It’s also important to remember that no one cares as much about your money as you do. Even good property managers may not move as fast as you’d hope they would.

      That said, I use a property manager b/c I don’t want to be tied down PLUS I hate dealing with tenants.

    • retirebyforty June 20, 2016, 10:31 am

      We had a few property managers before and they did not do a very good job. They are fine on the day to day stuff, but they just don’t pay attention to the place like I would. They miss things…

  • Kate @ Cashville Skyline June 20, 2016, 5:54 am

    Wow, that’s amazing your rental property’s value has increased so quickly! And that’s fantastic you’re seeing positive cash flow. I don’t own a rental property, but my father and Aunt inherited a two-family home just outside of Boston. I tried to encourage them to hold onto it and rent it out, but they were overwhelmed by the thousands of dollars in repairs the property needs. Plus, they don’t think they have the energy to deal with tenants anymore. The house is going on the market at the end of this month and it’s probably worth about $600,000.

    • retirebyforty June 20, 2016, 10:33 am

      It’s pretty crazy how much the property appreciate recently. This market seems hotter than the last boom in 2005…
      I think selling the rentals is a good choice for your dad. I probably don’t want to deal with tenants when we’re 60. That’s why we plan to sell in 13 years. Once junior finishes high school, I want to walk the earth for a while. 😀

  • We have 10 units – including an 8 unit apartment complex. Actually walking out the door now to do some lawn work there (we manage it ourselves) BUT we have an investor coming to look at it today. We didn’t have it on the market but were contacted by a realtor with someone who is looking for apartment complexes in our area to purchase. It will be interesting to see how this unfolds! You have some great potential in your numbers and I’ll be coming back to check it out more this afternoon – off to see what happens here!

    • retirebyforty June 20, 2016, 10:34 am

      Good luck! If the price is right…. 🙂

    • Tanya July 6, 2016, 11:33 pm

      Beware of the realtor coming to you. I have been burned. Just be aware, they may not be what they say they are.

  • Mr. Tako @ Mr. Tako Escapes June 20, 2016, 6:46 am

    I’m curious about what comparable rents in the neighborhood would be. Are you over or under comparable rents? I’m guessing its under.

    That’s some pretty impressive capital appreciation you have there! Bull markets have a habit of making every investor look smart when times are good. If there was a hypothetical Portland market crash, how would that work out for you?

    • retirebyforty June 20, 2016, 10:38 am

      I just checked Craigslist and it’s anywhere from $1,100 to $1,800. There are a wide variety of units for rent in this neighborhood.
      If the housing market crash, I think we will be fine on the duplex. We don’t plan to sell for at least 13 years so that’s way off. I want to sell our condo when we move to the duplex in a few years, though. We’ll see how the market looks. If it is a bad time to sell, then we’ll probably rent it out for a while.

  • Ken June 20, 2016, 6:49 am

    You didn’t mention Depreciation expense on the rental property, which is a non-cash item, but represents a reduction in your Adjusted Gross Income and your overall income tax on income from other sources, right? With your relatively high basis (original cost and improvements) this should be a significant figure. Lowering taxes must be an important part of the RB40 plan.

    • retirebyforty June 20, 2016, 10:42 am

      Depreciation is nice, but you have to pay back when you sell. The 25% depreciation recapture tax makes it a bad deal for the landlords in the lower tax brackets. I will need to do more research. I don’t think there are anyway to avoid depreciation recapture tax. Doing a 1031 exchange will only delay it.

  • Jim @ Route To Retire June 20, 2016, 6:53 am

    You sounds like your handyman skills are about where mine are! 🙂 I actually found a handyman that has helped me with some of the changes that I needed to make on our duplex… if not, that place would be scary if we relied on me to do the work!

    The appreciation in your area is mind-boggling to me – congrats on that! In the meantime, it sounds like the cash flow is starting to build up slowly but surely so that’s good. Do you owe anything on the property right now or do you own it free and clear?

    — Jim

    • retirebyforty June 20, 2016, 10:44 am

      I can do small jobs like replacing the light fixture and caulking, but I don’t know how to do big jobs. Siding repair, roofing, and other big jobs are quite expensive. I really need to find a handy man.
      Yes, we owe about $200k on the place.

  • Jamie June 20, 2016, 7:18 am

    Have you looked at “peerstreet.com” for investing in real estate? Love to hear your thoughts. MMM invests in it, and my research tells me that it’s a very strong offering. The loans are backed up by the property and they’ve never had a default.

    • retirebyforty June 20, 2016, 10:45 am

      I haven’t looked at peerstreet.com. I will check it out. We don’t have cash to invest right now, though. Once we sell our rentals, then I probably would invest more in crowdfunding real estate deals. No defaults sounds really good. 🙂

  • Sam @ Financial Samurai June 20, 2016, 7:28 am

    Got to love it when your NEIGHBOR goes on market and hopefully sells for a much higher price! Damn, I shoulda bought me some Portland property too! It’s good to know what the POTENTIAL is for your sale if you did the remodel.

    I’m starting on my latest project: building a 280 sqft deck off my master bedroom. It’s not a great ROI, but I’ve always wanted to walk onto a deck into fresh air.

    S

    • retirebyforty June 20, 2016, 10:47 am

      I was surprised, they are asking that much. It would be great if they can sell it at that price point. No taker yet, though. They might have to lower the price a bit.
      Enjoy your project. That sounds like a nice addition.

  • Fiscally Free June 20, 2016, 7:33 am

    I didn’t realize the Portland market was so hot.
    Portland seems to be really trendy these days. Do you think that is going to prove to be a fad?

    • retirebyforty June 20, 2016, 10:50 am

      It might be a fad, I don’t know. There are more well paying jobs here now, but I don’t know if this level can be maintain. Software jobs can be fickle in a recession. We don’t have a lot of big tech companies here like Seattle and the Bay Area. It seems most the software jobs are run out of small offices. I doubt we can maintain this pace over the long haul unless Portland can attracts more companies.

  • The Jolly Ledger June 20, 2016, 8:11 am

    We sort of fell into the rental market, since our first residence was under water and remains that way today. Instead of losing money we chose to rent for the time being. With renters, someone else is paying the mortgage and we make a little money. If it ever regains it’s value (and then some) we will consider selling.

    • retirebyforty June 20, 2016, 10:50 am

      Keep at it. The property markets are improving all over the country. I’m sure your property will regain the value someday. Where are you located?

  • David June 20, 2016, 10:42 am

    Great to hear that your rental is doing well.

    Many part-time real estate investors consider selling eventually as they grow tired of managing the investment or their lifestyles change. I’ve learned some very painful lessons through my parents’ mistakes. Invariably, every property they sold was a mistake because it would be worth so much more now. They could have retired in luxury vs. living rent check to rent check.

    Assuming it continues to be a good investment, here are reasons not to sell:
    1. Capital gains tax (unless you do a 1031 exchange)
    2. Transaction fees (ballpark 10% of sales price)
    3. Forfeiting future gains
    4. Loss of all sorts of tax benefits (obviously varies for everyone)
    5. Loss of property tax benefit. In California, due to Prop 13, property taxes increase much less slowly than appreciation. Any new property you buy of equivalent value will have a higher property tax.

    Instead of selling, consider the following alternatives:
    1. Hire a management company. Even with their 5% to 10% management fees, it reduces your stress, avoids the cons of selling, and you will likely offset the fees if they actually rent the units at market rent. Many landlords don’t like to raise rents (I don’t), but a management company treats it more like a business.
    2. Do a cash out refi. Assuming you can get a good interest rate, and you can reinvest it for a higher return.
    3. Do a 1031 exchange into a type of real estate investment that is less management intensive (e.g., triple net lease).
    4. Just hang on. If you pass it on to your heirs, they will receive a stepped up tax basis on the property, and they can sell it virtually tax free (Check with your accountant on this one).

    • retirebyforty June 21, 2016, 10:36 am

      Thank you for your input. You’re right. That why I try not to check the values of the properties I sold. It’s pretty crazy.
      We’ll either get a property manager or sell when we’re older, probably around 55. Managing the rentals are okay now, but we want to travel.
      A 1031 exchange might be a good idea. We did that when we got the duplex. Hanging on is a great plan too. Once the basis stepped up, the big tax hit would be the depreciation recapture. You can’t avoid that.

  • Our Next Life June 20, 2016, 1:57 pm

    Glad you’re expecting positive cashflow this year! We have a rental house, and have yet to hit positive cashflow — especially accounting for income taxes — but some of that was calculated so that we could get a 15-year mortgage instead of a 30 to get to higher cashflow sooner. Also our taxes will be drastically reduced when we retire next year, so we won’t lose a third of the rent to income tax anymore! Thanks for sharing the dark flipside to renting — it’s not all easy money! Lots of work involved, and sometimes you lose money!

    • retirebyforty June 21, 2016, 10:40 am

      Good luck with your rental. Usually having a rental is good when you have other income. The loss and depreciation can offset some of that income. I guess your income is probably too high to take advantage of it.

  • Martin - Get FIRE'd asap June 20, 2016, 4:03 pm

    Hi there RB40, rental properties can be a great addition to the investment portfolio as they have a reasonably guaranteed return if managed properly. I currently have 3 properties located in the red-hot Auckland (NZ) market. I’ve had these for a while so am lucky enough to have seen their value increase significantly over the past few years.

    One of the things I picked up from your post is that you are not raising rents in keeping with Portland market rates, and that you are keeping the rent from one of your units low as a favour to the tenant who has some issues.

    I do understand completely why you feel a sense of moral responsibility for looking after your tenant, however, you also need to look after your own interests too. I treat my rentals like a business and although I keep my rents reasonable, I have no issue raising them annually in line with any increases in my costs and in line with the cost of living which I think is reasonable.

    If the property becomes unaffordable for my tenants, as much as I would hate to see them go, I am not prepared to subsidise their living expenses.

    As you have already found, being an older property means additional maintenance costs which will impact your return. This needs to be paid for from somewhere and rent received is the means to keep on top of this.

    My suggestion, review rents annually and if your costs have gone up, put the rents up by a similar percentage. Explain to your tenants why and hopefully they will understand.

    That’s my 5-cents worth anyway. Hope you don’t mind the input.

    • retirebyforty June 21, 2016, 10:43 am

      Exactly! I am a terrible rental investor. The tenant moved and I fixed up the place and increased the rent.
      I don’t like to raise the rent too much. That will cause more turn over and finding good tenants is very difficult for me. I prefer to raise rent moderately every year. If a tenant moves out, then I will fix up the unit and raise rent to market price.
      Thank you for your advice.

  • John June 20, 2016, 4:17 pm

    Nice to see improvement on duplex and I do appreciate you showing the true costs of being a real estate investor. The general assumptions usually include 10-15% of the rent in maintenance and vacancy to calculate return on cash and of course it never works out like that.

    I do rental property in Houston things are chugging along. Below 400k here remains competitive but above that it’s starting to become a buyer’s market with the slump in oil price. No crash yet but we’ll see how diverse this city really is in the next few months.

  • Lazy Man and Money June 20, 2016, 8:01 pm

    Wow that’s some appreciation. Our properties in Massachusetts are around their 2000 levels… not close to the 2005-ish peaks and close to the 2009 prices after the collapse.

    I keep waiting for any significant move, but it simply isn’t happening. Most of the gains are in Boston and the very close suburbs. Our properties are a little outside that.

    I’m hoping that expanding prices will push people out to us, but so far it isn’t happening.

    We’ve got time… so we’ll wait and see.

    • retirebyforty June 21, 2016, 10:44 am

      Our condo is finally back to 2007 value. The property pricing here is kind of weird. Some properties shoots up and some stays low. Good luck with your rental.

  • Jeff V June 21, 2016, 6:56 am

    Real Estate is nuts by you! In a good way, if you are an owner.

    Our house was built for $180k 6 years ago, and would probably sell for $200k maybe, with a finished basement. Rochester isn’t a high growth are, and high property taxes (~$5400 on our house) are a deterrent as well.

    – Jeff

    • retirebyforty June 21, 2016, 10:45 am

      Oh wow, the property tax is expensive for the house price. We pay about half that rate.

  • Dividend Diplomats June 21, 2016, 6:33 pm

    RB40,

    Nice – it’ll get better! Try to increase again next year on the tenants, or ask the top floor one that you may have some work to do and see where they stand?

    Also – that huge spike in real estate value is re-assuring, hope no bubble is on the horizon… I purchased my small house of 1,400 square feet back in fall of 2011, for around $93K; and the value has changed maybe $15-20K in that time frame, so upwards of 20%? Not too bad, right?

    -Lanny

  • Little House June 23, 2016, 6:27 pm

    That’s awesome appreciation value! I’d be thinking of selling. 😉

    • retirebyforty June 24, 2016, 7:46 am

      I’m thinking about it. 🙂

  • Watson Inc June 26, 2016, 1:16 pm

    Those darn repairs. Took care of 2 of them within the last month ($$$). That said, I have enjoyed real estate investing so far. Congrats on the appreciation.

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