Does A Duplex Makes Cents In The Wasilla Market?
Or dollars as the case may be.
First I should tell you that most of the 31 duplexes currently on the Wasilla real estate market do not cash flow.
Cash flow means that after you collect your monthly rent and pay your monthly expenses, you still have at least a dollar in your pocket. Hopefully you have a few hundred dollars.
Most of the duplexes on the market today will cost you money at the end of every month unless you use a very large down payment to decrease your loan amount and your payment.
Here is the situation.
Purchase price, $250,000 Monthly with rents totalling $1,000 per side.
- 5% down = $12,500 which results in a loan for $237,500
- At 6.5% interest for 30 years you have a P&I of $1,501.16
- With $3,000 annual taxes and $1,200 annual insurance your PITI is $1,851.16
- Garbage pickup=$30 per month
- Maintenance Costs = $200 per month
- Management Fee = $200 per month, ( you need to figure this in even if you self-manage)
- Vacancy rate $100 per month (that’s a five percent vacancy rate)
Total costs so far = $2,381.16.
So you are going into the hole at a rate of $381.16 per month. There are other hidden cost which inevitably come back to bite that aren’t figured into this.
So How does it make sense? (Or cents)
…Well let’s try this!
You are someone who only wants to pay about $150,000 or less for a home. You look on the market and really can’t find anything that you like for a home in that price range. So you get the bright idea of buying a duplex and living in one side.
Let’s compare the cost of a $150,000 house to a $250,000 duplex:
- With 5% down you have a loan of $142,500 on the house
- At 6.5% interest for 30 years thats a PI of $900.70
- Add taxes and insurance and you are at a $1,150.70 PITI
- Figure garbage and maintenance at $220 per month
That comes to a total monthly cost of about $1,370 or so. We left utilities out of the equation since you will be paying them in the duplex as well.
If you move into the duplex and pay the $1,000 rent to yourself and absorb the $381.16 cents negative cash flow you are about breaking even.
So…Duplexes only make sense under one circumstance:
You have put down a large enough deposit to reduce your loan payment down to a level where the duplex will cash flow.
In the first example of the $250,000 duplex, we need to reduce the loan payment by $381. That means you would need to put down $75,000. That would give you a loan of $175,000 and you would have $14 in your pocket after paying your bills each month.
Occasionally duplexes come one the market that actually produce income with a minimal down. I sold 2 like that this year. But most of the time they do not and that is why there is 31 months worth of inventory on the market right now.
PS…09/08/07…I have had a couple people contact me privately with some disagreements or corrections to this post. I can add an appendix if I need to but if you think I’m nuts, go ahead and comment.…