The Duplex Store

T.E.A's FREQUENTLY ASKED QUESTIONS

Q) What areas would you recommend an investor like me to buy in? I'm looking for something that will appreciate, but will also produce a little income, I'm basically wanting to break even at least.

A) I recommend properties based on condition, price and rental performance. Austin in general has good properties available in every area. However the public demand into certain areas is greater than in others. For graphic proof of public demand, please download my "Days on the Market" graph. Lower (shorter) days on the market means higher demand -- people stepping on each other trying to get into that particular area. I try to buy the best value properties in those high demand areas. Demand generates appreciation. Cashflow is based on rental performance and how much money you put down. Many Austin duplexes and fourplexes will break even at 10% down, the great majority of them will cashflow at 20% down. Remember, 20% in Austin is usually no more than $40,000. If you are simply seeking more appreciation and can just break even, it is better to pay more for a high-demand area as you will get much better appreciation, and your potential to raise rents is better. If you are seeking more income each month and doing this long-term perhaps 10+ years, I would recommend buying several lower priced properties in lower demand areas (these will appreciate and eventually become high demand areas). Or if you have a large amount of cash to put down, perhaps around $150,000 to use, I'd personally try to put down 20% on 3 properties in a high demand area. This will get you both cashflow and appreciation.

Q) How do you calculate the annual tax--is the tax amount on the property list what I am going to pay? Or, a new buyer has his/her own new tax calculation which is different than the present owner's?

A) Taxes are calculated every year in January based on the county appraiser's determination. Normally this determination is well below what you pay for a property. For example, you purchase a duplex in a nice area for around $180,000. The county assessor (appraiser) values that whole area's similar duplexes to be about $165,000. You will only pay the taxes based on the county's appraisal, not the price you paid. The city will send you a letter at the beginning of the year letting you know what to expect. You won't be billed until the end of the year. You have until January 31st to pay the tax bill. You will more than likely pay the same amount of tax as the previous owner paid, the sale of the house does not trigger a new county appraisal. The tax bill is not based on sales price at all. If the county sends you a letter asking about details of your recent sale, more specifically, they will ask how much you paid for it - it is your choice to respond, this is voluntary information you give the county to raise your taxes -- so, you decide whether or not to give them that information.  I personally do not volunteer the price of my home to anyone, county or otherwise.

There is a detailed tax calendar (quite boring actually, but worth a look) located at:
http://www.window.state.tx.us/taxinfo/proptax/stmt/stmt0412/stmt0412_2.html

Q) What is the insurance rate? How do you calculate that? Without these two numbers, I can't come up with cash flow number accurately.

A) Insurance really depends greatly on how much you want to cover the property for. If you want full coverage it will be quite expensive, just like car insurance, but if you get the minimum necessary to acquire the loan on the property, then it's not that expensive. Normally a duplex can be insured for around $70- $100 per month depending on how many bells and whistles you add to your policy. A fourplex usually costs around $120-140. All this depends on size and the materials it was built with. It will fluctuate, but not by much. If you buy 3 sides brick or stone, it will be slightly cheaper than a property that is 4 sides wood or masonite. Depending on the insurer, you may only be able to to cover up to 3 properties, while some insurers will cover up to 80 properties. This is usually not a problem for most folks. You can always change insurers if one is not performing for you.

Q) What exactly does a property manager do? If I'm in California are the tenants going to expect me to come and fix the place if something breaks? How does the percentage per month work? Do you manage properties?

A) Property managers do a lot of necessary day to day activities for the property such as rent collection, accounting, respond quickly to maintenance calls, assist in move-in's and move-out's, show the property when vacant, and if need be -- handle evictions and legal matters. Property managers charge a monthly fee based on the rental income. The average fee is 7% of the gross monthly rents. If your property gets $1000 per month, the manager will collect this and then deduct $70 for their costs. Leaving you with $930 to pay your mortgage, taxes and insurance with. If you have a vacancy, they will normally charge at least 50% of the first's month's rent (a one time "lease fee") to cover their costs in advertising and showing the property. Each management company has a different rate and different terms, no two are alike, so please shop around for the one that best suits your needs. I used to manage properties, I do not manage them anymore, not to say I wouldn't, we might later on but for now we can refer you to some great managers.

Q) What about seller financing and zero-down loans? How can I get into real estate with no money out of pocket?

A) It's tough, but it is possible. If you owner-occupy a residence, you can do zero-down still even in after the mortgage crunch. Otherwise right now, coming up on 2008, the 0 down loans for non-owner occupants are non-existent, or, at terribly high rates, well in the teens.  Seller financing is possible in very few cases, but normally on larger unit purchases like a 4plex. For a Seller to carry a 10% note on a $150,000 duplex would mean basically $15,000 spread over several years at a low rate -- normally Seller's don't want to do this since they don't really make any money. However, higher priced properties like 4plexes and commerical properties - seller's are more willing to do this.

A) I wish I could say there were little or no expense in the sale of a house, however, the sale is quite expensive. There are title fees, agent fees and the ugly beast called Capital Gains taxes. It's pretty simple with title fees, usually 1% or just a little more. Agent fees normally are 6% (seller pays both agents). Capital gains is the tricky part. First, GO HERE - the IRS tax tips page on cap gains. Also, another FAQ from the IRS. If you own a rental property less than a year, you will be hit the hardest at possibly over 25%. The longer you own it, the better you will be, but after a year your tax is supposed to be pegged to your income bracket, which could be 15-20%. If you bought and sold a rental house within 1 year (you flipped it), any capital gains would be taxed as regular income. If you bought and sold a rental between 1 and 2 years, your gains would be taxed at the long term capital gains rate. Again, check with your CPA and other online sources, I'm not a tax expert, this is just what I've experienced out here with the sale of others and my own properties.

And some more we've collected:

1. Do I need a homeowner's or hazard policy?

-yes you need homeowner's insurance, however you won't have to actually pay for it until the actual closing date of your property. You will need to choose a provider, and there's tons of them. I would ask your current car insurance / renter's insurance if they cover duplexes and see what the rate is. Average is around $60-80 per month depending on size and construction (all brick being slightly cheaper than all wood paneling). On my contacts list I have insurance providers that can help you out.

2. Do I need a private umbrella policy to protect myself from a tenant lawsuit?

Well, insurance will pay for injury on the property to a certain amount, beyond this the tenant could go for your other properties (but not your personal residence). Most people end up putting a property into an LLC, and this protects your other properties from getting touched.

3. What kind of insurance do most property owners that rent out their property carry?

Many of our investors have just the minimum insurance required by the lender. Each property is different so there's no standard, as long as your lender is OK with it, I'd say it's pretty good because they don't want to risk losing their asset either. Hazard / fire insurance is normally all that is required.

4. Can I avoid paying PMI by doing "80/10/10" financing?

Yes, as far as I know, this is still OK although it has gotten slightly harder to get the other 10% loan.

5. Is 8% of gross rents a fair assumption of cost for a full-time property mgmt company to take care of everything since I'm out of state?

8% is just a little above average. We have several companies that will charge 7%, one that charges 6% and another that charges 5%. Depends on where your property is, for example, if it is in a high-drama area, they may want at least 7% since they will be fielding more calls. But yes, a fair assumption, we do all our numbers based on 7% mgt.

6. I don't want to pay all the utilities for a tenant but I do want to pay the water bill so that they don't stop watering the lawn. How much would monthly water for a duplex cost?

You've gotta be the nicest landlord in the world, I've got about 1000 tenants that would love you for this. The water bill would fluctuate greatly depending on the number of people in the unit. If you have a family of 4, you can count on $30-50 a month, per side. This is very nice of you, but you won't need to do this. Austin rarely has droughts and very rarely needs sprinkler systems or constant watering, you'll be happy to know that we're humid enough that lawns are green without constant supervision. I don't have a sprinkler system and I wish I owned a gravel quarry because I'd put rocks everywhere so I wouldn't have to mow it each week...

7. Do I need to pay separate money for lawn maintenance or does the tenant or prop mgmt company usually take care of it?

Another good thing is that tenants are required to do their own lawns out here, this will be in the lease you sign with them. The only reason why you'd need to be responsible for this is perhaps we buy a place that has an irregular shaped or "shared" yard that can't be defined or mowed by each tenant fairly. If you wanted to splurge on monthly lawn maintenance, it'll run you about $30-50 per time for the whole place (front and back of whole property). You only need to do it about 8 months of the year when the grass is not dormant. The mgt. co can line this up. But usually the tenants take care of it.

8). I have a question, Why are they selling a lot of Duplexes in Round Rock? What are the pros and the bad side of Round Rock?

A) Actually, there's very few duplexes in Round Rock to begin with, the ones that are on the market are at a normal volume for this time of year (the busy season in summer). It will drop off as December approaches, leaving about half of what's out there now. The majority of RR duplexes are located off Gattis school road, East 79 (Sunrise) and near Bowman, these three communities contain roughly 100 or so properties. Of those, about half are excellent condition, the other half being good to fair. Very rarely will we see a dog out there. There are a couple of small communities west of 35 in RR near Hester's crossing / La frontera, and again up north near Sam Bass rd. west. Not as many as on the east side though. West side oddly enough has several annoying flood plains that put several RR West duplexes in the middle of flood zones, leading to higher insurance costs depending on the house. We routinely buy and sell RR duplexes, there is good demand since the prices are generally lower than Austin duplexes, but carry the same rent as something in Austin, while usually in better condition. The only downsides are; fewer people in the market keeps prices from going up as rapidly as say something in Austin; and the Williamson county taxes are higher on certain properties.

    1) How do I estimate what my taxes would be on these properties?  Is there any extra taxes for out of state investors or anything like that?

A)  On the listings it should have a spot where it gives you the taxes on each property.  The taxes will be quite close to what they are on the listing.  Our taxes out here, as high as they are, don't change too much year to year.  Taxes in Texas are not triggered by a purchase or sale, you won't be paying taxes based on the sales price, you will pay taxes based on the voodoo-rich appraisal of the county appraiser.  They usually get about 80% of market value on their appraisals.  You pay the same property taxes any one else would pay regardless of your residency.  If you actually owner-occupied a property, then at that point you'd have a homestead tax exemption / discount.
        
        2) How should I factor in bills for utilities when looking at the numbers?  I noticed one of the properties said that the tenants pays the bills.  What is standard in Austin?  And, do you have an estimate of how much bills would be for a fourplex?

A)  many 4plexes out here have common water lines, meaning, there's one single water pipe and it's split to 4 units.  This by extension means that the owner will receive the water bill, and the owner would need to pay it, or bill it back to the tenants each month;  this is called allocated billing.  We prefer to buy 4plexes with all seperate meters, but many times with limited properties we often don't have the choice.  The water bill could be around $25-40 per unit depending on how many people are in the unit.  A large migrant family (majority of 4plex tenants) has lots of kids and will use more water than perhaps a single guy - unless he's overly metro or OCD...    But, usually the only bill that would be shared would be the water bill, we normally don't get anything that has the owner paying both water and gas.
        
        
         3) I noticed one of the properties mentioned "long-term" leases.  Is there a way to determine when the leases expire on these properties?

A)  To some degree.  On the listings it should have a spot on there that lists the occupancy details including lease expiration dates.  We always verify this on properties we're interested in, but we wouldn't be able to get copies of leases until we actually went under contract - seller's won't pass over tenant personal info until that point.  
        
        
         4) In terms of location and condition, I noticed that the property listing says "see disclosure" for condition.  Do we know what is in the disclosures?

A)  "see disclosure" could be one of two things - the agent didn't write the listing correctly, or, there is a disclosure.  If there is a disclosure, it's possible there could be condition issues, not sure at this point, but I'll find out.
             
        
        
        5) I can't recall what I should expect to pay in property management fees?   

A)  Property management here in Austin is 7% average, lease fees (the commission you pay the manager once they lease it out) can range from 50% of one month's rent to 75%.  
        
        
         6) Other than taxes, insurance, property management, and maintenance, are there any other expenses that I should be considering?  For example, I'm assuming I would have to pay for gardening -- do you know how much that would run?

A)  Lawncare on 4plexes would just be very basic mowing the lawn.  Wouldn't need to really do much else.  That'll run about $30 and you probably only need to do this for about 8 months of the year, maybe an extra time if we have a lot of rain.  4plexes don't have large yards, most of the ground is parking
        
        
         7) Finally, what is customary for the offer/counter-offer process?  In other words, what type of initial offer would you make on any of these properties?

A)  Well, really any offer you want to make is fair game.  An offer that is most likely to get close to acceptance will be probably something that is around 10% less than asking.  I don't write any offers until we check out the recent sales in the area and make sure their asking price is anywhere near the market value.  Of which on any of these I'll get you comps on.