It’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|
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.
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.
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.
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.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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