An Unexpected Opportunity – We Bought a 3rd Duplex!

30 Jun

Big news – our rental empire just got a little bigger! We weren’t actively looking for another investment property, but we stumbled upon this little beauty and decided it was too good to pass up.

The Property
Compared to our investment property wish list, it checked off all the boxes:

  • Duplex – for easier cash flow and diversified vacancy risk
  • Expected monthly rent is at least 1% of purchase price (a.k.a. 1% Rule)
  • Newer construction – ideally built after 2000
  • Reasonable driving distance from where we live (trying for a 20-mile radius, but we’ve made exceptions before)

Both sides are rented with long-term tenants, but they are each paying significantly under market rent (~$400/month total). That means the 1% rule doesn’t apply just yet, but the long-term outlook is solid.

I also like that the duplex is in a 3rd city – just in case a certain part of town appreciates better or worse than others. We’re generally optimistic in the growth of the area – plenty of shopping, freeways, and the town is being considered for multiple industrial projects (*crossing fingers*).

Current Rent: $1,700 total
Market Rent: $2,050-$2,190 total
Purchase Price: $201,000
Current Rent-to-Purchase Ratio: 0.84%
Future Rent-to-Purchase Ratio: 1.02%-1.09%

A Calculated Risk
We found ourselves in a bidding war with 2 other buyers, both making cash offers. In order to be competitive with a mortgage, we paid slightly more than asking because we still saw value in the rent-to-purchase-price ratio. Additional funds were required to make up the small gap between appraisal price and purchase price.

We had the better part of a down payment already set aside for a single family home, so that was reallocated plus a little more from our personal savings. It was a bit of a financial stretch, but it worked out alright.

Down Payment: $61,500 (30.6%)
Mortgage (30 year fixed): $139,500

Next Steps

  • Get Units to Market Rent – We don’t have the luxury of keeping tenants significantly below market rate right now, so we’ll be upping the rent when leases expire – and dealing with the resulting vacancies.
  • Address Repairs – some minor issue were found during the inspection that can wait until we have a vacancy, but we don’t want to let them linger longer than we have to.
  • Replenish Savings – we like to have at least $5k per property set aside for a rainy day, so we need to beef up that account to $15,000 – ideally $20,000 if we can swing it.

Between the additional emergency savings, our recent make ready work, and this purchase, our mortgage prepayment efforts have come to a screeching halt. With all the moving parts, we feel a little financially exposed – so you might notice an uptick in money-related posts as I keep a closer eye on cash flow. 😉

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10 Responses to “An Unexpected Opportunity – We Bought a 3rd Duplex!”

  1. Eric Hegwer June 30, 2014 at 7:06 am #

    Congrats! You are well on your way! Do you have an ideal goal of how many units you want to have?

    • kathy151 July 8, 2014 at 9:00 am #

      Thanks Eric! I suppose the grand plan is to off-set all of our personal expenses someday. I ran the numbers a while back – it basically comes out to ~5 paid off properties or ~13 mortgaged ones. Interestingly enough, it was actually faster to get the 13 properties – assuming numbers stay like they were, but who knows what things look like even 5 years from now. 🙂

  2. FI Fighter July 7, 2014 at 7:32 pm #

    That’s so awesome, congrats!! I love multi-units and would love to add a tri, or quadplex… Unfortunately, prices in the Bay Area are insane, and a quad might go for close to $1MM nowadays…

    Getting above 1% Rule should give you some good cash flow each month! 🙂

    • kathy151 July 8, 2014 at 9:02 am #

      Welcome FI Fighter – I’m a big fan. 😀 I’m definitely appreciative of the relative “deals” available to me in Texas compared to what I read about elsewhere. Actually, you might consider TX for long-distance landlording… we have TONS of CA investors here.

  3. No Nonsense Landlord July 7, 2014 at 9:41 pm #

    Great job. Did you mean to say “Newer construction – ideally built before 2000”, or after?

    Great cash flow on the rentals, from the previous post. I suspect that any “auto and travel will be minimized for next year with Duplex #2. And also repairs will be less.

    • kathy151 July 8, 2014 at 10:02 am #

      Good catch – fixed!

      Travel from the first-half of 2014 is definitely reduced vs. 2013 – thanks to the property management company. Repairs should definitely be less for duplex #2 – we purchased that property as an empty foreclosure, so we had a lot of get-it-up-to-speed tweaks at the very beginning, but its been relatively trouble-free since then.


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