In my last discussion on the topic of Buying a Duplex to Rent and Hold (2) I narrowed my search to two potential good investment opportunities. The properties decidedly differed in almost every imaginable way save for one, they were both true duplex properties. I believe picking either property would have been a good investment but had to narrow my choice to one of them. The decision process I use comes down to comparative analysis in the areas of financial gain, maintenance considerations and overall ease of management of the property. By focusing on these aspects independently I find a clear choice emerges as a result. I will summarize the comparisons using the labels property 1, (older duplex) and property 2 for the newer construction duplex:
Present value— Property 1 in my opinion was worth at the time 155k, factoring in the update costs of 40k that would bring the present value just shy of 200k. Property 2 was listed at 200k and was being undervalued due to the short sale status of the property. Since the time frame of the sale was in the window of a ‘buyers market’ and the housing market was in a state of free fall, (had been for the last three years) I knew the pricing for both was more than reasonable. I would lean toward property 2 as being the better value as it was being undervalued even in the present markets climate. The future value is always an optimistic guessing game, but property 2 would always outperform property 1 due to its newer construction.
Return on Investment— The CAP rate for property 1 came in at about 8% while property 2’s CAP rate was 10%. This two percent margin should not be taken lightly as a future value increase in the property in say 10-15 years will mean you will have more of the actual gains available to you at the 10% CAP (it can really add up over time)! Before the financial guru’s start chiming in on this very simplistic measure of ROI, keep in mind I use the CAP rate mostly as means of comparing properties and to evaluate if the investment will be profitable at all, ( I stay away from properties with a CAP rate below 9% when investing in them).
Land— Property 1 had the least amount of land to maintain but the entire back yard property line required a tall and functioning fence to protect occupants from the water line, (the property was located on a large pond). On top of this the small dock area was a major concern for safety considerations and I would need to address this area; most likely getting rid of the broken dock and continuing the fence, to prevent access from the property.
Property 2 had a large flat grassy area in the front while the back overlooked about 2 acres of wooded area. A lawn mower and some trim work would take care of the front while the back yard would need some trim work every few years. Property 2 had the best land use and maintenance would be manageable, while property 1 would have less land and would need constant monitoring of the protective fence.
Property Structure— It was obvious that property 1 would need a lot of immediate renovation and reconstruction, while property 2 would require some light updating to one of the kitchen areas.
Functional Aspects—Property 2 was good to go in all functional areas,(electric, hot water, heating, plumbing and waste/ water). Property 2 would need an updated heating system x2, an update to the electric service and new hot water heaters for starters.
Ease of Management:
This topic can be a bit subjective. You need to be able to imagine how certain management scenarios would play out in the two differing properties and which property would be the better fit in the given scenario. One example would be the parking situation. Property 1 had a semi shared parking area which typically leads to parking disputes in my experience and winter snow removal, (not just plowing) would be necessary. Property 2 had a well defined right and left parking area and plenty of space to plow snow without having a removal service as well.
Another example is road noise, a typical concern for prospective renters. Property 1 was closer than property 2 to a major road and was located near the top of a hill near an intersection, truck air brakes would be a definite issue. Overall I felt that property 2 would be the easiest to manage.
The above analysis strongly leans toward property 2 as did my gut feeling. Although property 2 was more expensive and I generally don’t care for short sales, ( a topic for another post) my wife and I both agreed to pursue property 2. We have owned the property for several years and I can tell you that the visits for maintenance and management of the property have been minimal compared to our other properties. The property has been easy to rent and the occupancy duration has been better than average. The down side is the present value has not budged much but an upturn in the housing market should help increase the value in the next few years, (knock on wood).