Not too long ago, a first time buyer asked what I thought of the idea of a duplex as a first purchase. The obvious allure is instant income that will help pay down the note on the property.
Having had, at various times, in my own portfolio up to 28 units both mixed use and strictly residential, I said to my client a phrase often heard in my profession: buyer beware. Further, I said it with a little more emphasis than I ordinarily would have.
The first and, in my opinion, most important thing to consider is whether the financial expectations will perform as they pencil out in theory. In an area such as my own market, an affluent coastal community, rents are high, so my client's theory was basically sound. However, his dream is the same as so many other buyers, first time or otherwise. As such, the type of property he hoped to find, even in a more stable market, is in great demand. As always, the law of supply and demand applied, and purchase price became the issue.
As an example, so far this year, 11 duplexes have sold in two of the local beach cities in the areas directly adjacent to the beach, also known as the "Sand Sections." With prices ranging from just over one million at the low end, and up to 3.2 million at the high end, the average price is $1,573,636, averaging $875.95 a square foot.
Of course, the more my client had on hand for a down payment, the lower his monthly payments would be. The lower the monthly payments, the more the income from his second unit would provide toward paying part of his mortgage.
Once all the financials had been discussed and confirmed, I asked my client, a busy young attorney trying to make junior partner, if, after driving for an hour from downtown every night, he'd be willing to face his tenant and any issues they may have with regards to their unit. Did he really want to devote his valuable time to servicing the needs of his tenants? This was, in fact, an issue because he was only qualified to purchase up to 1.175, a price that would purchase, at best, a fixer well over 40 years old.
After careful consideration, my client decided to buy a slightly less expensive, but much newer town home, one that will undoubtedly appreciate, then leverage his way up into his first income property. Making sure your client thinks through every aspect of their purchase is the essence of building a good, lasting relationship.
Of course, this is one individual's set of circumstances. While purchasing a duplex proved to be ill advised for my client, it will vary on a case by case basis.
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