Is Our Duplex a Good Investment? - Retire by 40 (2024)

It 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 basem*nt whenever we get heavy sustained rain. The brick wall in the basem*nt is old and the mortar is porous. Once the ground is saturated with water, it leaks into the basem*nt. This last winter was actually pretty good and it got wet only once. I have a dehumidifier in the basem*nt 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 basem*nt. 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 basem*nt and turn it into another Airbnb unit. One of my neighbors said they made $50,000 last year from their basem*nt 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.

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.

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.

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 basem*nt 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 basem*nt, 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 basem*nt 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 propertiesis 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 withRealtyShares 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 cansign up with RealtySharesto browse the various projects and see if real estate crowdfunding is a good match for you.

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