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Is Our Duplex a Good Investment?

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Our Duplex Investment - 2018 UpdateIt has been a long time since I gave an update on our small rental duplex. This house is a single family home that was converted to a top/bottom duplex back 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 duplex is located in a great area that I always loved. I lived in this neighborhood for a few years in my 20s and really enjoyed it. There are many neat shops, restaurants, cafés, and small grocery stores nearby. The public transportation is great too with streetcar, light rail and bus service. It’s my favorite neighborhood in Portland and we may move into the duplex at some point.

However, from an investment standpoint, this duplex isn’t good. This home was built in 1895 and has a few issues. The biggest problem is that water leaks into the basement whenever we get heavy sustained rain. The brick wall in the basement is old and the mortar is porous. Once the ground is saturated with water, it leaks into the basement. This last winter was actually pretty good and it got wet only once. I have a dehumidifier in the basement and I turn it on whenever there is water on the concrete floor. That works for now, but we’ll have to deal with this problem before we can remodel the basement. OK, I’ll do a quick recap, go over the numbers, and then share the good news.

Quick Duplex Investment Recap

In 2014, we sold our 4-plex and rental home. The traffic had worsened in recent years and it took about 40 minutes to drive out there. We had a property manager for these properties, but they didn’t do a good job. It seems like local management companies take on too many properties and are spread too thin. Anyway, I did a 1031 exchange to avoid the capital gains tax and purchased a duplex close to where we live.

This duplex is just 10 minutes away and it is easy for me to drop by to do minor maintenance. 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. All our tenants have been awesome. They pay rent on time and never have any drama. It’s been really great so far.

Recently, I’ve been thinking it might be a good idea to move into the duplex because we need more space. Our 2 bedroom condo was perfect when we were a DINK couple, but now it is really tight. RB40Jr is growing up fast and he wants more space. My mom also stays with us for 9 months/year. We’ve outgrown our small condo. I plan to take over both units and perhaps rent one out on Airbnb when my mom isn’t here. Also, we might refinish the basement and turn it into another Airbnb unit. One of my neighbors said they made $50,000 last year from their basement unit. He could be exaggerating, though. Running an Airbnb unit would be more work, but it’ll be a chance for Mrs. RB40 to try out being a host. She always thought it’d be fun to run a B&B. This might be a good project for her once she early retires in 2020.

Lastly, using this home as a primary residence will help us minimize capital gain tax when we sell the place in 2029. I’ll be ready to move on after RB40Jr graduates high school. BTW, this home is in a great school district. That’s another reason why I like it.

Duplex purchase

All right, I warned you at the beginning that the duplex isn’t a great investment. Many of our readers are real estate investors and I’m somewhat embarrassed to talk about the details. The numbers don’t make sense from an investment standpoint. The location is great, but the price went up years ago. We could have purchased a home in a cheaper area and that would have been a much better investment. However, the schools in the up and coming neighborhoods are not good at all. That’s a big concern for us so we went with a less optimal investment. All the numbers are rounded for simplicity.

  • Purchase price: $560,000
  • Down payment: $360,000. This money is from the 1031 exchange.
  • Mortgage: $200,000
  • Rent in 2014: $2,020

This duplex completely fails the 1% rule of thumb for rental investment. That 1% rule says the rent should be 1% of the purchase price. So for this property, the rule means we need to charge $5,600/month in rent. That rule is pretty much impossible in this area. The ratio for this duplex was just 0.36%. That’s way below the 1% guideline. The rental market has been very hot in Portland over the last few years and this number has improved since then.

Rental Cash Flow

The duplex is actually doing okay with cash flow. This is because the down payment was so large. The mortgage for this property is just $1,000/month. We made some big repairs when we first purchased the home and now it’s just routine maintenance.

The rent is quite reasonable for this neighborhood. The previous landlord did not raise rent annually so the rent was way below market rate in 2014. Once I took over, I raised rent a little every year and now we’re getting near market rate. Here is how the rent has changed since I took over.

Rent 2014 2015 2016 2017 2018
Upstairs $820 $895 $950 $1,095 $1,195
Downstairs $1,200 $1,200 $1,450 $1,595 $1,650
Total $2,020 $2,090 $2,400 $2,690 $2,845

 

The upstairs unit has one tenant over that period and I didn’t raise rent much. The rent is still below market rate, but it really needs a makeover. Our upstairs tenant is great so I don’t want to change anything right now. Once he moves out, we’ll remodel the unit. The downstairs unit had a turnover in 2015 and it is renting near market rate now. I upgraded the unit and raised the rent when the previous tenant moved out. Here a picture of the living area in the upper unit.

upper unit living area

2017 Recap

2017 was our best year so far. The duplex was 100% occupied and we didn’t have any big repairs. I just finished our taxes so I have all the numbers. Check it out.

  • Rent received: $32,280
  • Mortgage: -$12,000
  • Property tax, HOA, utility, maintenance, insurance, and repairs: -$9,307

We had positive cash flow in 2017 and made $10,973 in passive income. That’s not all, though. The rental property gave us some additional deductions.

  • Mortgage interest paid to bank: $8,087
  • Depreciation: $9,827
  • Auto and travel: $258

From the IRS’ standpoint, we made just $4,186 from this property. This is one nice tax benefit of owning a rental property.

The rent increased about 40% since we acquired the duplex. The rental market is cooling down a bit now so I’m not going to raise rent much next year. Also, the city enacted a 10% rent increase cap in 2016.

A picture of the living room in the lower unit.

lower unit living area

Good News

The cash flow was good in 2017 and it should improve a little this year. Another piece of good news is the price appreciation. The Portland real estate market has been excellent for owners over the last few years. I think we got into the neighborhood at a good time in 2014. Earlier would have been even better, but that’s alright. We got in early enough.

Our next door neighbor sold their rental home for $1,050,000 in late 2016. That’s an amazing price. It is bigger and the interior has been completely remodeled, but it is still 10 feet away. The new neighbor put in more money and remodeled their basement into an Airbnb unit. I’m eagerly waiting to see how it does. Anyway, I’m pretty sure we could get at least $800,000 if we put the duplex on the market. If we finished the basement, the price should increase quite a bit more. There are only a few single family homes in this area so it’s difficult to compare. On Zillow, I see one bedroom units go for $350,000 and 2 bedroom units for over $500,000. Single family homes with finished basement go for around a million dollars. However, you never really know until you put it up for sale.

I think the Portland housing market is starting to cool off, though. The housing price and rent have increased too much over the last few years. The underlying economy isn’t strong enough to support these kind of prices. Portland is not Seattle or the Bay area. There aren’t enough big companies here. Portland has many small satellite offices and I doubt those will do well when a recession hits.

Slowly Improving

To wrap it up, our duplex investment is slowly improving. The rent has increased quite a bit since we acquired the property. The price appreciation is also really good. My plan is to move into this duplex when one of the tenant moves out and then take over both units eventually. We’ll live there for at least 5 years so we can take full advantage of the $500,000 home sale exclusion. After that, I’m not sure. If we like living there, we might stay until RB40Jr finishes high school. There are a lot of moving pieces so we’ll just have to be flexible and adjust as we go along. Mrs. RB40 might get a new job in a different city or retire early. We’ll see how it goes.

Eventually, I’d like to get out of local rentals completely. Investing in rental properties is a great way to build wealth, but it can be a lot of work. I want to travel more and live in other parts of the world. Fortunately, there are other ways to invest in real estate without being a landlord. One way is to increase the REIT holdings in our investment portfolio.

Real estate crowdfunding is also a good option because some areas in the US are still recovering from the housing crisis. Investing in US heartland real estate is a much better prospect than in Portland where the price already recovered. This year, my goal is to increase our investment with RealtyShares to $100,000. I expect real estate crowdfunding to generate about 7% passive income annually and an additional 5-10% whenever a project wraps up. This is assuming nothing goes wrong, of course. I’d like to try PeerStreet at some point as well.

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

You can sign up with RealtyShares to browse the various projects and see if real estate crowdfunding is a good match for you.

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

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

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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{ 77 comments… add one }
  • Ernie Zelinski April 16, 2018, 12:25 am

    You ask, “Do you own a rental properties? How is your local real estate market doing?”

    No, I don’t own any rental property. I have two friends who each own several properties in my home town of Edmonton. Both have had problems renting their properties because the vacancy rate is quite high. One of my friends wound up with a drug dealer in one of his condos and spent two months trying to get this tenant evicted. The other friend has had one of his condo units empty for around 5 months.

    There, doesn’t that make you feel better about your rental property?

    • retirebyforty April 16, 2018, 9:47 am

      Really? I thought Edmonton is doing well with the rental market. I imagine eviction is just as tough as here. It’s a pain and I hope we don’t have to deal with that. Yes, that makes me feel better. 🙂 Thanks!

  • Lily | The Frugal Gene April 16, 2018, 12:26 am

    Our rental if we hired property managers who takes a cut would fail the 1% rule as well. Adding on the maintenance and work and I consider it a mild fail. Thankfully price appreciation in the Pacific Northwest has made up for it in this department but I totally get how you feel. In front of professional real estate investors, I feel a bit silly.

    We loved our rental neighborhood too. Still do. It’s absolutely stunning and breathtaking. This time last year we thought we would move into it ourselves, but moving pieces and all that stuff really changes our plans.

    I don’t think it’s an exaggeration to make $50k with Airbnb. Last year I bought in $79k…but it’s a lot of work..and stress. You’ll know what I’m talking about after you start haha. Lots of pet peeves…

    • retirebyforty April 16, 2018, 10:07 am

      Seattle area is a lot more expensive than Portland, but the economy is way better. It seems like you can’t make the 1% rule work unless you buy a distress property in a really crappy area. Then you get problematic tenants which is a lot worse in a way. How many units do you have for Airbnb? $79k is awesome. Nice job.

      • Lily | The Frugal Gene April 18, 2018, 4:59 am

        We had 2 small bedrooms and 1 entire place. And I think it was $82k not 79. The 1% rule doesn’t float in prime Seattle areas, nope! We put in a larger than usual down payment and it was barely floating. We are thinking of moving some money into RE elsewhere for me parents sake so it’s a personal issue too.

  • Mr. Tako April 16, 2018, 12:56 am

    I’m not much of a real estate investor Joe, but it seems like the “play” in high-cost areas (like Portland) is all about capital appreciation, not income.

    RE investors in these areas are constantly flipping properties. Sometimes it works for a long time… until the market slows down. If you think the Portland market is overheated, then maybe it is a good time to get out of the rental game and put your real estate money elsewhere.

    • retirebyforty April 16, 2018, 10:09 am

      You can make income work, but probably only in really cheap areas. Our old 4-plex was like that. The income was okay, but there were a lot of drama too. I’m planning to get out soon, but the timing is tough. It will probably take a few years to cut down to one property.

      • jim April 16, 2018, 1:07 pm

        If I recall right you bought that 4 plex originally around the bottom of the housing recession. That price and the ROI from it was more of an anomaly for markets like ours.

  • Kenny April 16, 2018, 1:03 am

    Yes, duplexes are the best investment. In my town, we call it 2 Unit Buildings and I have some of my own and enjoy them since I am never hung dry on the rent since 1 unit is always rented out and the other one is empty. I had 3 apartments open in March and they are not filled up, with 2 of them getting me double rent due to Lease Breaks (cancellation penalty in my contract) for the month of April. Each of these 3 were in different buildings, and they were all rented out within 2-3 weeks and that was because I was being selective about the tenants / background / finances / references. Nothing in the background check guarantees anything (seriously). But, the main point is that having 3 empty at the same time is unusual for me, but each were in a separate building, and even if 1 would not have rented, the other unit in the same building was rented, so income keeps coming in. Remember the 3 units were in 3 separate buildings with multiple units in them (one is 2 unit, another is 4 unit and 3rd was 3 units). So, all in all, a fantastic way to do rental business.

    Having said ALL of the above, and having not found any more to buy, I CAVED in and bought my first HOME (yes, Single Family Home). It was a lucky deal since the bank listed the foreclosure on 24th Dec and I bid on 26th and pressured them to make a decision. One more bidder came in and I had to outbid him and got the property. It turned out that the SFH was listed as 1587 sq ft with 3 bedrooms, and when you count the finished basement and finished attic, it turned out to be 8 bedrooms total with a 4 car garage (tandem 2 + 2) with all spaces in basement and attic completely finished already with drywalls, ceilings of regular height, closets and hardwood (real 1/2″ wood) floors (need to refinish to make it look great again). Just have to redo some parts of the home with paint, varnish, new sinks and few more odds and ends worth $5-6K and I have a property that would give me an instant 40% appreciation after expenses, although NOT going to sell. If it does not rent, then I will sell. Hope it pans out……It is all luck at the end of the day.
    All of the above just sounds TOO GOOD to be true, but when banks get rid of stuff in foreclosure, it has to be checked out since the bank was in NC somewhere and this is in a completely different state!

    • retirebyforty April 16, 2018, 10:11 am

      Wow, it sounds like you got a great deal on the SFH. That’s awesome. That property sounds like it would be hard to rent out, though. It’s too nice. 🙂 Good luck!

  • Michael @ Financially Alert April 16, 2018, 1:10 am

    Joe, I have 3 investment properties and a couple fractional interests in some apartment complexes. So far the markets are holding up in these areas (San Diego, L.A., Las Vegas, & San Antonio). Rent has gone up a lot in San Diego, so we were able to increase our rents last year by an extra $200/month.

    • retirebyforty April 16, 2018, 10:12 am

      Nice job! You’re a much better real estate investor than I am. The rent increase is fantastic. SD is getting really expensive…

  • Troy Bombardia @ Bull Market April 16, 2018, 2:55 am

    I think people assume that real estate crowdfunding can never go down. It can. Real estate has boom and bust cycles just like the stock market.

    • retirebyforty April 16, 2018, 10:14 am

      I think US heartland real estate still have room to grow. I wouldn’t invest in expensive coastal real estate at this point. It’s be interesting to see how real estate crowdfunding handle a down market. Apartments will probably keep renting. The income probably decrease and timeline extended. We’ll see how it goes.
      Thanks for your input.

  • Accidental FIRE April 16, 2018, 3:20 am

    I don’t have any rental properties and don’t think it’s something I’d be interested in doing. But I enjoy reading about the experiences of others and I could probably be talked into it if the time and conditions are right. I would need a full time property manager though, I don’t want the hassle.

    I love the skylights on that place!

    • retirebyforty April 16, 2018, 10:16 am

      The skylights are awesome in the upper unit. They help lighten the place up a great deal. That unit would make a great Airbnb. I’m ready to get out now because the market is high. If we get another real estate crash, I might try to get back in again.

  • Jim P. April 16, 2018, 4:00 am

    I’ve been a landlord in the past, but currently don’t have any properties. I like the idea of realty shares but don’t think our net worth qualified for the minimum, the last time I checked. I think they wanted to see 1M of invest-able assets? Sounds like a great plan you have w/ the school district, etc. I’m going to be running some numbers to compared a vacation home purchase w/ just doing Airbnb.

    • retirebyforty April 16, 2018, 10:16 am

      You can check out Fundrise if you’re not quite there yet.
      Good luck!

  • gayle April 16, 2018, 5:00 am

    I have 4 rentals , my kids are in two of them, I have one in downtown Chicago..I only make $100 a month..but I love the area ( best part of the city), so I will keep it for now. Also I have a townhouse 40 miles south of Chicago, this one I make $400 a month. Im growing equity for now , and I like the fact that dI have money sitting there If I ever need it. Joe your house doesnt sound bad ! My husband hates them all..and says “sell them”

    • retirebyforty April 16, 2018, 10:18 am

      That’s the problem with rentals. It takes time to make good passive income. Equity is a nice bonus. My wife doesn’t like being a landlord either. 🙂

  • Pennypincher April 16, 2018, 5:33 am

    Nice duplex, Joe! Lots of curb appeal, light, bright, and airy. I’d move in. Why? Location, location, location-also great for resale. Along w/good schools that will pay off big time for Jr.
    One major, relatively inexpensive solution for your wet basement is two words-water diversion. You could get free opinions from pros (landscapers too) on this. Downspout diverters/extensions come in all types of models. Then I’d work on getting it 100% dry (baby steps!) and ventilated. All good for future resale value.
    I’m not seeing a great return (ROI) on my house, and only do repairs, upgrades, nothing big.
    But hey, we all need a place to live, as my accountant says! Keep it (all) simple, Joe! : )

    • retirebyforty April 16, 2018, 10:19 am

      We already tried water diversion. It helped a lot, but the ground still gets saturated. It’s going to be tough to get 100% dry. I might put concrete sidewalk all around. That should help a lot. Thanks!

  • Adam April 16, 2018, 5:35 am

    We own a 1921 bungalow and I am right there with you regarding the wet basement problems. Just got hammered overnight with 3″ of thundershowers so I went down to plug in our dehumidifier just now and sure enough, the north wall is leaking and our sump pump has been working all night long. Fortunately(?) the ceiling is really low and I’m 6’2″, so we have zero problem with leaving it alone as unfinished space for storage and laundry. 🙂

    If you choose to finish and waterproof your basement, I hope it works out that you can do so in a down market. These last few years of local prosperity have seen contractor rates skyrocket and availability plummet.

    • retirebyforty April 16, 2018, 10:50 am

      You’re right about the contractor. It’s really hard to get any work done nowadays. There are so many new buildings in the city. We’re not in a big hurry so that’s alright.

  • Tom @ Dividends Diversify April 16, 2018, 5:42 am

    Only own 1 single family home Joe. Curious, does a house built in 1895 need a lot of maintenance? Tom

    • retirebyforty April 16, 2018, 10:51 am

      It’s actually pretty good now. We fixed quite a few things in 2014 and 2015. Hopefully, no more big repairs for a few years. Mrs. RB40 wants to remodel the kitchen, but that’s choice.

  • [email protected] April 16, 2018, 5:57 am

    Joe – Knowing what you know now, would you buy this rental property again?

    At one point I rented out a condo that I purchased for personal use. It was a great place to live but not a good investment even though it was close to the 1% rule. I’ve stayed away from the real estate investment world since.

    • retirebyforty April 16, 2018, 10:52 am

      I like the property and the area so yes. Mrs. RB40 probably doesn’t agree with me. She prefers to keep it simple. 🙂

  • Angela @ Tread Lightly Retire Early April 16, 2018, 6:00 am

    That home is adorable. I love older homes, but we’d never own one due to all the maintenance reasons you list. As far as the 1% rule, I don’t think those homes exist in the northwest right now, unless perhaps you’re talking much larger properties. There are some good articles out there regarding the cooling market, if you know what to look for.

    • retirebyforty April 16, 2018, 10:53 am

      I’ll check around for the articles about cooling market. We need to prepare for that.
      Older homes have a lot more character than the newer cookie cutter homes. 🙂

    • jim April 16, 2018, 1:10 pm

      You’re probably not going to normally find a 1% rule property in Portland or Seattle.
      Other smaller markets in the Northwest could probably fit that criteria but they still might be harder to find.

  • Ms. Frugal Asian Finance April 16, 2018, 6:03 am

    The two units look fabulous! I really like your plan to move to the duplex and AirBnB the basement. I hope the plan goes well and look forward to the next post about it! Will RB40 Jr. be living in the one bedroom with you and Mrs. RB40 or in the other unit with your mom?

    The housing market in Portland indeed sounds expensive. But it’s nice to see our property appreciate a lot in value 😉

    • retirebyforty April 16, 2018, 10:56 am

      Thanks! The units are separated by the stairway and unit doors. We could leave the unit doors open and it’ll be just like an SFH. It shouldn’t be a problem to share all the space. I’m sure DC is a lot more expensive than here. 🙂

  • Tammy April 16, 2018, 6:10 am

    Hey Joe. Long time reader, first time commenting.

    We have one rental condo. We’ve been renting it out for five years now. We would have finally broken even this year but it required a lot of repairs so that’s going to set us back.

    But we are in Toronto which is a completely insane market so appreciation has been ridiculous to this point. We own another unit in the same building which is our primary residence. We’re hanging onto both for now. We will sell one eventually we just don’t know which one yet. It will come down to lifestyle choice once we are closer to retirement. That’s 5-10 years away.

    Cheers.

    • retirebyforty April 16, 2018, 10:57 am

      Great news about appreciation. You should check the tax rule. If you have the capital gains exclusion law like in the US, then you should live in the one you want to sell. I’m not sure how much you have to pay in capital gains tax in Canada, but it’s probably not cheap. Good luck!

  • Matt April 16, 2018, 7:03 am

    Hate to burst your bubble, but you won’t be able to use the entire $500k primary home exclusion when you sell. You will have to recapture all the depreciation you took including on the property that was 1031’d into this one. Also, I believe you will have to pay cap gain tax on the gains before it was converted to a primary (not quite sure about this since it is rare to convert a rental into a primary vs. the other way around so consult a CPA).

    • retirebyforty April 16, 2018, 10:59 am

      Yes, I know about depreciation recapture. It shouldn’t be a huge deal, but we’ll see.
      From my research, the capital gains exclusion kicks in 100% once you live there for more than 5 years. It will have to be prorated if you live there less than 5 years. I’ll double check with a CPA when we sell. Thanks!

  • Dave in Sunny FL April 16, 2018, 7:10 am

    Congratulations on your rentals! In planning for retirement, it’s our income property that just makes financial magazines like Kiplinger’s and Money irrelevant. They are focused on people trying to survive on a dwindling nest egg, managing longer and longer retirements and ever-higher costs of living. You mentioned three of the five ways that investment property pays you back: cash flow, appreciation, and depreciation/other tax benefits. The other two ways real estate pays are payoff of your loan principal, and the corrosive effect of inflation (i.e., the dollars you hand back to the bank in 2029 are each going to be much weaker than the dollars that the bank provided for your use in 2014). I enjoy listening to a podcast on this topic from Keith Weinhold, called Get Rich Education. Keith is one of Robert Kiyosaki’s “Rich Dad Advisors.”

    • retirebyforty April 16, 2018, 11:00 am

      I’ll check out Keith Weinhold. Thanks for the recommendation. I’m not sure if I want to be a landlord when I’m older. We’d need a good property manager, for sure.

  • Helen April 16, 2018, 7:44 am

    Joe, that’s a cute house. The house price in central Ohio went up some in the last couple of years. It’s still quite low compared to Portland. People can get a big mansion for half a million. The cost of living is still reasonable here. That’s one of the reasons I love living in Ohio.

    • retirebyforty April 16, 2018, 11:01 am

      Thanks! The cost of living in Ohio sounds great. It’s getting more and more expensive here. Housing affordability is getting to be a big issue. I should write a post on that.

  • Jim @ Route To Retire April 16, 2018, 8:24 am

    It’s funny to see how different the markets are in different parts of the country. Paying $560,000 for a place makes my jaw drop… but I’m in Cleveland. I paid $98k for our duplex a couple years ago and it was rent-ready and built in 1967. We get around $750 per side so we’re good on the 1% rule.

    My first property was a 5-brdm house that I bought around 15 years ago for $69,500. We lived there for a few years, fixed it up, and then rented it out. We were getting a little over $700 per month on it. Not great, but I didn’t know what I was doing at the time. Luckily, we had the same tenants in there for 9 years! However, they just left and we’ve decided to sell it – it’s not in a good neighborhood and it’s a seller’s market so now’s the time.

    Similar to you, we’re going to have to decide if we stay in the game and get another property or if we take the money and run – maybe use it to buy more REITs?

    Good luck to you on your duplex!

    — Jim

    • retirebyforty April 16, 2018, 11:03 am

      Right. The cost of living is getting high around here. It’s not as bad as CA or Seattle, but we’re getting there. $98k for a duplex sounds like an absolute deal. Is that in a good area?
      Nice job with your first property. Having a good long term tenant is the best.
      Good luck to you as well.

      • Jim @ Route To Retire April 16, 2018, 5:46 pm

        Yes, the duplex is in a good area and bringing in a good return so we’ll definitely be keeping that one.

        I didn’t realize how high the cost of living was in Portland. If the prices keep climbing, you’ll be happy you hung onto that duplex! 😉

        — Jim

  • FromUSA April 16, 2018, 9:07 am

    One of my neighbors said they made $50,000 last year from their basement unit. He could be exaggerating.

    —–

    Yeah. Definitely exaggerating!
    That is equivalent to Airbnbing it out all 365 days a year at a rate of almost $140/day … for a basement room.

    Just not even remotely realistic.

    Also, what’s the tax treatment on Airbnb income?

    • retirebyforty April 16, 2018, 11:09 am

      Actually, $150/day is about right. I doubt he got 100% occupancy, though.
      I’m not sure about tax. I think it’s just part of your income.

  • Mr Crazy Kicks April 16, 2018, 9:45 am

    I didn’t realize you needed to make it a primary for 5 years instead of 2 if you did an exchange… Either way, if you can make it in there for 5 years, you’d earn some huge tax savings!

    I keep going back and forth about rentals. A lot of the numbers around here look similar to yours for the cash flow aspect, but we haven’t had any appreciation to speak of… That’s been one heck of a ride you’re getting out west 🙂

  • Olivia April 16, 2018, 10:03 am

    Have you considered physically buying a property in the heartland and hiring a property manager for it? Seems like you’d get the best of both worlds!

    • retirebyforty April 17, 2018, 8:43 am

      I don’t like being a long distance landlord. I want to be able to see how things are going. My experience with property manager hasn’t been great. They don’t have time to take care of your property.

  • Lazy Man and Money April 16, 2018, 10:41 am

    I think you hit on something that happens with almost all real estate investing (at least in my experience).

    It slowly improves.

    Over the years, mortgages get paid off (or refinanced to lower levels), rents go up, appreciation goes up. Even if something starts out poor (like a 0.36% ratio), it can move to a place where it is bringing in $2500 mo. in cash flow (after mortgages are paid off).

    As for taking care of the local properties, I’ve decided that’s going to be my sons’ job. If they want to do all the work themselves, they can keep all the money I’m going to pay them for it. If they want to get a property manager, then they’ll collect much less for just keeping it out of my hair. They stand to inherit the properties, so I think we can work the math out so it’s a good deal for each of us.

    • retirebyforty April 17, 2018, 8:45 am

      Rental property is a long game. Inflation is on your side for once.
      Good luck with your sons being property managers.

  • SomeRandomGuyOnline April 16, 2018, 11:39 am

    I don’t have any physical rental properties at the moment. I live in the Bay Area, so home prices are pretty high right now. While I do think I would be able to find properties in foreclosure or available through public auction, that would require a lot of up-front capital that I just don’t have at the moment. I do have some crowdfunding investments through PeerStreet and RealtyShares. Also have some REITs, so at least I have some skin in the game. Thanks for sharing!

    • retirebyforty April 17, 2018, 8:46 am

      I think in those area, it’d be tough to find foreclosure and good auction too. There are professionals that have a lot more experience already doing that. Good luck!

  • David April 16, 2018, 11:40 am

    I left the corporate world a year after you and have really enjoyed visiting your site. Like you, I’m a stay at home dad with a working spouse except my side gig has been real estate investing instead of blogging. (Like you, I also have an engineering degree). I’ve acquired several investment properties in the last 5 years–several apartments plus a single family home.

    What I’ve learned is that the more doors per investment, the better the cash flow. My apartments cash flow much better than my single family home. Yet the appreciation is comparable for both (at least in my market–Los Angeles).

    For me, the cash flow is just gravy. I don’t depend on the income to live so my wealth building strategy is focused on appreciation. I look for investments that allow me to apply a minimal down payment of 20% to 30%. The leverage allows me to maximize return on capital. For now, any positive cash flow is reinvested back into the property for upgrades and repairs further increasing the value of the property. Apartment values, unlike single family homes and to some extent duplexes, are more directly tied to operating income which is something within my control.

    I like your idea of moving into the duplex if you think you would enjoy living there and addressing the water issue makes financial sense. It sounds like you need to make a move, so why not to someplace you already own?

    However, if the duplex is not a viable future home, I would definitely trade up in a 1031 exchange–looking for greater leverage while having some cash flow. Real estate is an important part of one’s investment portfolio. While RealtyShares is a low hassle option, I don’t believe you get the same tax and leverage benefits. I’d be happy to discuss my investing experience with you in greater detail if you’d like.

    You can also check out my Quora answer on this topic. https://www.quora.com/Is-it-possible-to-become-very-wealthy-from-being-a-landlord-buy-properties-and-rent-it-out/answer/David-Dean-61

    • retirebyforty April 17, 2018, 8:49 am

      Thanks for sharing! I found that more doors equal better cash flow as well. The problem is that I couldn’t find a good multi-plex in good area. They seems to be in sketchy areas around here. They’re probably more common in LA.
      You get some tax benefit from RealtyShares, but no leverage. Leverage and inflation are the best things about investing in rentals. Good luck!
      Your answer on Quora is great. Thanks for that too.

  • Young FIRE Knight April 16, 2018, 12:39 pm

    Real estate investing is something I’ve been looking to get into, though finding good deals has been tough. Only in certain areas can the 1% rule be fulfilled, which has me on the sidelines until I can find something worthwhile. We’ll see if anything comes up!

  • Revanche @ A Gai Shan Life April 16, 2018, 1:07 pm

    “Investing in rental properties is a great way to build wealth, but it can be a lot of work. I want to travel more and live in other parts of the world.”

    I don’t want to live anywhere else but I did want the freedom to do as we wanted without being fettered by more than our kid and dogs so that was worth paying a property manager to take care of our rental instead of being hands on. Plus for risk mitigation, and because I didn’t have over a million in capital to blow, I didn’t buy in the Bay Area. Could you imagine having our own home AND our rental destroyed in a quake? No thank you.

    • retirebyforty April 17, 2018, 8:53 am

      Good move with getting a property manager. I guess I’m too much of a control freak. I just didn’t like how they manage our properties. Good idea buying outside of the Bay Area too.

  • jim April 16, 2018, 1:22 pm

    You paid $560k in 2014 and its now worth $800k. Thats >40% appreciation in 4 years or 9.4% compound annual growth (at least on paper). Plus your cash flow return around 1%.

    Thats a good investment in my opinion. But most of its in the appreciation and thats not realized.

    • retirebyforty April 17, 2018, 8:53 am

      That’s a good way to look at it. I think the appreciation will really slow down now, though. Thanks.

      • David April 17, 2018, 5:54 pm

        Actually, Joe’s return is even higher. He had a down payment of $360K. Let’s assume he invested another $40K for repairs and upgrades making his invested capital $400K. That makes it a 60% return in 4 years. If we were calculating total return, we would also need to consider monthly cash flow, principal reduction on the loan and tax benefits.

        If Joe had an even smaller down payment of 25% to 30%, his return would be higher still. That is the power of leverage in real estate. Despite the historic bull market in stocks, I’ve done much better in real estate in the last 5 years due to leverage.

  • Chris Urbaniak @ deliberatechange.ca April 16, 2018, 1:22 pm

    Nice looking place, Joe. We used to have a rental but sold it last year when the tenants moved out. Got lucky and caught the market peak.

    As recently as a year or two ago, there were still plenty of places in Southwestern Ontario that met the 1% rule. Now it’s harder, but the deals certainly do exist for those willing to get creative in their searches.

    • retirebyforty April 17, 2018, 8:54 am

      Nice job! Did you have to pay a lot of tax when you sold?

  • Caroline April 16, 2018, 1:37 pm

    I own three rental properties and so far the home value hasn’t increased in the last five years:( And none of them meet the 1% rule. I check the market almost everyday (I love real estate) and I haven’t seen anything in town that meets the 1% rule!

  • Jason April 16, 2018, 2:28 pm

    We don’t have any rental property, but I have definitely thought about it for passive income in the future. To me the market is just too hot right now and I wouldn’t get a deal. That is what I am looking for. I wouldn’t even mind going in with a partner who knew what they were doing, but that is more difficult to find.

  • Financial Orchid April 16, 2018, 3:37 pm

    Bought REITs a few years back couldn’t withstand the daily volatility. Pulled out at a loss. Little money now but at the time was a lot for me. Like a bit if diversified brick and mortar to hedge against overall market volatility. At least I can’t see the daily price change of a physical place and have comfort I can live there if everything went to hell

  • Financial Sloth April 16, 2018, 10:17 pm

    Hey RB40. We have a fair number of rentals in different markets and they all (with 1 exception) pass the 1% rule, but we actively look for properties that satisfy this rule so they all should pass, otherwise we don’t buy.

    That said, Portland has been an awesome market for capital growth so if you take your capital gains and divide them over the holding period and add that to rent, you will probably be more than fine. And we always use PM companies. Partly because of the geographic spread, and partly because I just really don’t want to be bothered so much. We have had some bad PMs, but right now everything is pretty cool. I’m starting to learn that spending time and energy looking for a good PM is probably as much (or more) important than time and energy spent looking for a property.

    And as we all know too well, at the end of the day, it’s the sleep test that really matters with investments. Can you sleep well at night? If yes, than it’s a good investment. If no, then start looking for your exit. – FS

    • retirebyforty April 17, 2018, 8:56 am

      Good job! You’re right about finding a good PM. It’s really hard in Portland. They all seem way too busy. My friend just told me a friend is trying to rent a place and they couldn’t get through to the PM for over a week now. That’s crazy.

  • Codrut Turcanu April 17, 2018, 3:57 am

    Real estate crowdfunding? Didn’t thought crowdfunding is something that can be applied in real estate as well…

    I would say the local real estate market here in Bucharest, Romania is stable… prices went up a few years ago and now they remain about the same.. cheers!

  • Steve April 17, 2018, 7:26 am

    I’ve heard that Portland is a great spot for Airbnb’s. So who knows, if you move into the duplex and decide to go that route, you may come out ahead. Plus you’ll have more space like you wanted. Insane to hear about the market though. Buy a home for $500,000 and possibly earn $1 million from it? Crazy!

    • retirebyforty April 17, 2018, 8:57 am

      Portland is getting more expensive everyday. We’re still way behind the Bay area and Seattle, though. They pay $1 million for a small house and still profit a ton. It’s really crazy in CA.

  • Mr. Groovy April 17, 2018, 11:29 am

    That’s a nice looking home, Joe. A lot of character and charm. And even though it falls below the 1% rule of thumb, you’ve managed to make it work. A fine testament to your capable stewardship. Thanks for the update, my friend. Cheers.

  • Felipe April 17, 2018, 1:19 pm

    I’ve never heard of that 1% of purchase price rule. I always compared my net before income tax to the value of the house today. IE if I sold and put it into a dividend stock, how would it compare? I have no loan on it, so I think of the opportunity cost of having that money tied up in the property. But, I like having the property as a hedge against inflation. And I like the city (Denver) so if I ever want to move back I won’t be priced out of the market.
    I like the idea of moving back to the duplex, also. It makes total sense, you save on the headache of renting, and are there to manage the water issue promptly yourself.
    PS I do hear amazing incomes from VRBO/BNB units. It doesn’t seem real to me, either.

  • Mike Ballew April 21, 2018, 3:42 am

    Great article! We are planning to buy our first investment property this year, we have been saving for the past 6 months to accumulate enough funds for a 20% down payment and other costs such as renovating and closing costs. Good content, thank you for your post!

  • Mr. Blu April 23, 2018, 5:24 pm

    Hello Joe,

    I do own a rental property in a popular beach destination in the southern part of Brazil, near my hometown. I actually purchased and completely renovated the property a few months ago. I’ve got it ready right on time for the summer season down here. The net return I’ve got from January to March, during the summer season, was more than 3% over the total investment I did to purchase and renovate the place. I’ve got all the rentals using Airbnb. All went well and so far and I’m very happy with the investment, which also works for pleasure purposes for me, wife and friends on weekends sometimes. I just wrote a post about this experience on my new blog: http://brazilonfire.com/my-recent-1st-real-estate-experience-as-an-investor/

  • GYM April 24, 2018, 9:36 pm

    Wow it looks really nice even if it is over 100 years old! It’s very clean and well kept, looks like a great spot to move into. That sounds like a really good strategy you have, Joe. Airbnb would be a great idea for the 3 months of the year your mom is not with you. The City of Vancouver is not allowing homeowners to rent out their basement or laneway houses for Airbnb unfortunately- though I’m sure people are still doing it.

  • Predictable Snowball May 13, 2018, 7:34 am

    Its not an investment property…its a primary residence. If you look at it from the standpoint of a primary residence where you fortunate enough to rent out part of it to help pay your mortgage, its a great scenario! I dont think anything you live in can be viewed as an investment property in terms of the criteria used to evaluate. I say kudos on a great home!

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