Ten Myths About Buying A Duplex
1. Tenants will pay for the heat and electric even when it is not on separate meters: For some reason tenants often don’t budget for heat or electric and will often only budget for the cost of the rental unit. The other issue with this is that if the electric or gas company find out that you are charging the tenants for the bill when their units don’t have separate meters you will soon have a big issue. I know several instances where the utility company refunds the tenants the money that they have paid toward the bill, and then billed the owner!
2. Tenants still use dining rooms: I have found that almost no one uses them anymore. They can often be converted to a bedroom and bring in more rental income.
3. High-end neighborhoods are the best place to invest: When the economy has a down-turn these are often the hardest hit areas for landlords. Tenants that were once paying big rents scramble to find a less expensive place to rent, and the owners are stuck lowering their rental rate or having vacancies.
4. College neighborhoods are the best to invest: College towns and areas can be great due to the consistent influx of new tenants. They also tend to be harder on the properties. Wear and tear on College units become more expensive.
5. You will always be able to refinance out of your current loan: I just vomited in my mouth, sorry. Okay, if you haven’t figured it out from the recent debacle, once you get into a bad loan, you may not be able to get out of it. You may have noticed banks are offering short term ARMS again (adjustable rate mortgages). Don’t fall for the “your cash flow will be better” come-on that they try to sell you on.
6. All available properties are on the MLS: This is far from the truth. In one neighborhood in Minneapolis, I found that 28 of the 35 rental properties sold that year were not on the MLS! Some agents have access to more properties than what you see on the MLS (I am one!).
7. There is a Magic Formula that you can input any property’s data and know its value: A number of people believe that small residential investment properties fit into the same formula that apartment buildings do, where they are valued at a CAP Rate. This is far from the truth because the variables in a duplex or four plex affect the properties value more intensely than they do in an apartment. If you need to replace a roof, furnace(s), etc there aren’t as many units/income to spread out the cost, and it will greatly affect your return and what you will pay for a property. The one thing that buyers and sellers often don’t agree on is the actual condition of a property. Owners often see the property with Rose-Colored glasses and buyers often focus on the faults of a property. Somewhere in-between is the true value of the property which can’t be measured simply by a formula.
8. Vacancy Rates Should Be 5-10%: Not true unless you aren’t managing your property correctly. In over 300+ possible vacancy months I have had one! If you are buying property in the right area, and renting it at market value you shouldn’t have any trouble filling the unit, especially in this market. If you figure this high of a vacancy rate nothing will look good to you because you’re over estimating this one area.
9. All Realtors Are The Same: Last Summer I showed two properties to potential clients. They then “chased” me down, and said the person they were working with, that they hadn’t signed a contract with did absolutely nothing to help them other than open the door. The person you work with can have a big impact on finding the right property.
10. All Mortgage people Are the same: A lot of mortgage people, Loan Officers or Brokers, are the same. However, there are a small number of them that will find you a better loan program for your specific needs. For example on Loan Officer may be able to offer you conventional loans on your purchases of 5-10 properties whereas some cannot lend to you on more than 4 properties. In some other cases your interest rate and qualification for the loan maybe different lender to lender. Be prepared to shop around.