Need advice about buying a Duplex

Goldy

I need you guys to talk me into or out of the idea of buying a duplex. My mortgage with taxes and insurance would be about 800 bucks and I could rent out one side for 700ish. I want to keep the other side for me as a weekend place. My next door neighbor would be my best friend who is into cigars which is a great perk.

Now the bad, its not fully a duplex yet and would require some money to convert it. It has 2 kitchens and separate entrances but needs some the utilities split (no idea what that would cost) and needs updating. The downpayment would destroy our house fund obviously. We actually rent up where we work so it would be a choice not to buy a house where we work (cabin community in the middle of nowhere).

I want to rent out one side to some friends for a year or two while they save for their own house, this would give me time to slowly do the updating and repair work. After they move out I would have the option to list both sides and start making income on this property.

Any advice?

ScottU

Personally I'd go for it, but I would rent both sides out until I had rebuilt your cash reserves from the construction. Depending on if you have to have a new line pulled from the road for power, the power comp could charge a lot, plus having to put in a new breaker box and split the two sides could add up quickly...

Fourtotheflush

ScottU:

Personally I'd go for it, but I would rent both sides out until I had rebuilt your cash reserves from the construction. Depending on if you have to have a new line pulled from the road for power, the power comp could charge a lot, plus having to put in a new breaker box and split the two sides could add up quickly...

bingo, or wait 6 months as the houseing market is not expected to recover for a couple more years. Sit tight and save some $$$

Goldy

My only thought is that if I buy soon I still qualify for the first time home buyer credit. But to apply for it I would need to live in it "most" of the time for 3 years which is possible but not ideal.

xmacro

Be careful of the price - the housing market just fell 7% in the last quarter I think, so you've got a lot of buying power right now, and it may get even better (course, wait too long and it'll get worse, but whether that's in 1 year or 5 is up in the air). Here's three WSJ articles I dug up:

Home prices kept falling, but at a slower rate, at the end of last year as the housing market continued to stabilize. The national S&P/Case-Shiller home-price index declined 2.5% in the fourth quarter, compared with the same period a year earlier, according to a report released Tuesday. The slight drop is a clear improvement from earlier in the recession. In the fourth quarter of 2008, for example, home prices fell 18.2% from the same period in 2007. "Overall, this report suggests that the recent positive momentum in the U.S. housing market is gaining further traction and underscores that home prices are continuing to stabilize," Millan Mulraine, a TD Securities analyst, wrote in a note to clients. "As such, we may only be a few months away before we see a monthly gain in national home prices." There are early signs that the housing market has stabilized. The big question for 2010 is how housing will react after the government begins to move its support away, Nick Timiraos reports. The month-to-month change in home prices for a composite index of 20 housing markets that S&P/Case-Shiller tracks showed that home prices rose 0.3% in December from the prior month, adjusted for normal seasonal variation. That measure of home prices also rose 0.3% in November.Prices fell in just five of the 20 markets included in the survey, remained flat in one and rose in the other 14. Not adjusted for seasonal variations, prices fell 0.2% in December from November. Home sales tend to slow during the winter, which in turn can lead to a drop in prices and may explain the decline in home prices on an unadjusted basis. Robert Shiller, the Yale University economist who co-founded the index that bears his name, called the home-price rebound during the second half of last year "the most dramatic turnaround" since he began charting home prices in 1987. Home prices fell by 11% for six months ending in April 2009, before rising by around 5% over the following six months. The last time home prices swung so sharply was in April 1991, when a 5% decline over six months was followed by a 2% rally. The volatility in prices and the massive amount of federal stimulus have clouded the current outlook for home prices. "The market has shown a lot of momentum," Mr. Shiller said. "What trend are we seeing now? It's very ambiguous." Mr. Shiller said that one of his greatest worries about the housing market are so-called strategic defaults, where borrowers who owe more than their homes are worth and can afford their monthly payments choose to default anyway. "What worries me right now is the default rate on mortgages," he said. "It might go up because of a change in our sense of responsibility to pay mortgages. People are angry and upset." The number of homeowners who are underwater on their mortgages is growing. Some 11.3 million households with a mortgage owed more than their homes were worth at the end of the fourth quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif., up from 10.7 million at the end of the third quarter. Those problem mortgages are concentrated in the states that have had the biggest home price declines. In Nevada, seven in 10 borrowers were underwater at the end of December, up from 65% three months earlier. Nearly half of all borrowers in Arizona and Florida and one third of borrowers in California owe more than their properties are worth.

The housing market faltered last month as sales of previously occupied homes tumbled, according to a report released Friday. A separate report showed the overall economy grew faster in the fourth quarter than the government originally projected. The economy grew at a 5.9% seasonally adjusted annual rate in the fourth quarter, up from the previous estimate of 5.7%, according to a revised estimate of gross domestic product released by the Commerce Department Friday. Most of the improvement came from businesses drawing down inventories at a slower rate, a dynamic that adds to growth because of the way GDP is calculated. Consumer spending, meanwhile, was revised lower. "The strength in manufacturing is only a temporary factor and it's not likely to remain the driver of the economy," said Anna Piretti, a BNP Paribas economist, "and I think that's the one worrying factor." Another concern is the recent weakness in the housing market. Existing-home sales fell 7.2% in January to a seasonally adjusted annual rate of 5.05 million units, the National Association of Realtors said Friday. Sales of single-family homes also fell 6.9% to a seasonally adjusted annual rate of 4.43 million last month. Taken in combination with the even larger drop in new-home sales reported earlier this week, the data suggest that the housing market has hit a lull after a rush of sales late last year fueled by people scrambling to take advantage of a special tax credit. Severe winter weather is also blamed with dragging down the numbers. The tax credit had been set to expire in November, but was extended to cover sales through April 30 that close before July 1. Many economists expect sales to pick up again in coming months as buyers rush to beat the new deadline. The stock of existing unsold homes sitting on the market rose in response to last month's sales drop. The number of available homes represented a 7.8 month supply in January, up from 7.2 months in December. The updated GDP report shows housing contributed to growth last quarter, but at a lower rate than originally estimated. Residential fixed investment, the measurement of housing's contribution to growth, increased at a 5% annual rate in the fourth quarter, rather than the previously estimated 5.7%. The National Association of Realtors reported existing home sales plunged by 7.2% to a 5.05 million annual rate after buyers rushed to complete purchases in the fall amid fears the first-time home buyers tax credit wouldn't be extended. Above, a home for sale in Alameda, Calif. Added strength in manufacturing helped offset that. The slowdown in inventory liquidation added 3.88 percentage points to growth last quarter, up from the previously estimated 3.39 points. Trade, which also tends to boost manufacturing, added 0.3 percentage points to GDP, down from the 0.5 points in the earlier estimate. Manufacturing is a relatively small part of the economy. For the recovery to really take off and be sustained, growth in other segments—particularly consumer spending—needs to accelerate. The revised report was disappointing on that score, showing that consumer spending rose at a 1.7% rate last quarter, compared with 2% initially reported. All types of underlying demand remain weak. Final sales of domestic products, which strip out changes in inventories, rose 1.9% last quarter, down from the 2.2% originally estimated. But there are also positive signs. Businesses spent more than previously reported, for instance, and inflation remains in check. Americans still face headwinds from tight credit and high unemployment. Reflecting those factors, the University of Michigan/Reuters consumer-sentiment index released Friday was down to 73.6 in February from 74.4 the prior month. Consumers felt slightly better about current conditions but worse about the economy's potential.

Despite the appearance of chaos, the financial markets usually follow some intuitive cause and effect relationships. The problem with forecasting: sometimes the market's effect precedes the fundamental cause. The housing sector has recently been hit by a flood of negative news but it continues to stand firm. Perhaps the surge in Home Depot Inc.'s stock to a 2 1/2-year high on Wednesday isn't just a company-specific outlier and is instead a hint that the sector is gearing for a breakout. The SPDR S&P Homebuilders exchange traded fund (XHB) erased losses of as much as 2.4% early Wednesday, after data showing that new homes sales in January dropped to a record low. In addition, the Mortgage Bankers Association said Wednesday the decline in mortgage applications in the latest week suggests housing demand remains "relatively weak." Toll Brothers Inc. said the housing market is still in "choppy waters," and Goldman Sachs recommended shorting its U.S. housing basket, which is designed to be cyclically neutral, because "housing market equities appear to be pricing a much more optimistic view relative to the data...." The XHB recovered most of its losses and was last down just 0.1% at $15.73. Meanwhile, Home Depot (the third most-heavily weighted XHB component) has rallied 3.4% the past two sessions after reporting better-than-expected fiscal fourth-quarter results and raising its dividend. The release of the results isn't the only cause for the stock's strength, however, since it has now advanced 12% since the end of January. And contrarians can't simply attribute those gains to short covering ahead of the results. The number of shares sold short has been declining steadily for the last year and was at a 3 1/2-year low as of the latest reading. Basically, there aren't enough shorts to create a three-week long panic squeeze. While investors shouldn't expect the pace of Home Depot's recent gains to continue, the completion of a two-year old double-bottom pattern and the rise above the 200-week simple moving average suggests the stock's success is more than just a short-term phenomenon. And if you want to get fundamental, same-store sales turned positive for the first time in nearly four years, and the dividend was increased for the first time in 3 1/2 years. Perhaps the stock is trying to tell investors something. The XHB has done virtually nothing since early-August, but considering how fundamentals have tailed off, that could actually be considered a blessing. In addition, the XHB has remained above the 200-day simple moving average, as well as the December 2008 and May 2009 highs, during the stabilization, which in turn is making the November 2008, March 2009 and July 2009 lows look a lot like a triple bottom pattern. A move above the September high of $16.75 would confirm that pattern, and turn the consolidation since August into a support zone. That could free the XHB to eventually test the 200-week SMA, which currently comes in at around $22.30. The fundamental cause of that effect will eventually follow.

ljl

I have a two friends that did this (it was awhile back so they didn't get the credit). One was single and he made out like a bandit. He still has the place (doesn't live there now) and all it does is make him money. The other guy was married, had a kid while living in the duplex and wound up selling it to "break even" and get his own place for his new family - he hated it. Turned out the second guy rented to somebody who liked attention and was constantly calling him about house issues. Most of this stuff turned out to be nothing, but he felt he should do the right thing and keep up the place the right way. If you don't always plan to live in the area this might be a problem. As to the updates, you may want to check zoning regs to find out if this is allowed, also since you rent there, maybe there are association fees in this community that you have to figure in.