Duplexes and Multi-Unit Investment Properties

Ask me how you can get $10,000 in down payment assistance Burlington Duplexes

A duplex makes a great investment property for both the first-time home buyer and the seasoned investor.

For home-buyers on a tight budget, a duplex provides a way to purchase a home by helping to defray the mortgage payment. When mortgage lenders assess the income/expense ratios for a home-buyer, they’ll generally allocate 80% of the anticipated income for the property as additional income. A duplex with an apartment rented for $10,000/year will give the home buyer an income bump of $8000/year. Lenders use this 80% rule to account for vacancies and other unanticipated expenses over the course of the year that would keep the owner from earning the full potential rent. Unfortunately, lenders charge a higher interest rate on multi-unit buildings than they do for single family homes. Depending on interest rates, roughly every $100 you receive in rent allows you to buy $5,000 more of house.

When considering buying an investment duplex, ask to see rental history documentation like copies of leases, Schedule E income tax return statements, and maintenance and repair receipts. In Burlington, you will want to know if the home has had the Burlington energy audit completed and if the building has a current Certificate of Compliance issued by Burlington’s Code Enforcement Office. Owning rental units in Burlington is bit more difficult than it is in other cities in Vermont. However, with the Community and Economic Development Office’s down payment assistance program, it is often easier buying a duplex in Burlington than it is in other Vermont cities. The CEDO program is for purchasers of owner-occupied multi-unit properties of up to four units. The program typically provides down payment assistance of up to $10,000 in the form of a 0% interest deferred loan repayable at time of sale. If you meet other requirements, you may be able to have some of the loan forgiven after several years. Give me a call for more information.

For an investor, real estate is a great investment product. Usually you’ll invest in local real estate where you are something of an expert. How well do you really know the companies in which you may buy stock? Few other investment products allow you leverage your money as you can with real estate; you can’t buy $200,000 in stock with a $20,000 down payment. Finally, more often than not your property is appreciating over time, building you equity simply for owning it.

A rate of return often used in real-estate transactions. The calculation determines the cash income on the cash invested:

Cash on Cash Return = Annual Dollar Income / Total Dollar Investment.

For example when you purchase a rental property, you might put down only 10% for a cash down payment. Cash-on-cash return would measure the annual return you made on the property in relation to the down payment.

To determine your net operating income, start with your gross income and subtract your expenses and anticipated vacancy rate. For example:
Gross Income (GI): 10 units at $1250/unit/month = $150,000
Expected vacancy loss: 1 month/unit = -$12,500
Gross Operating Income (GOI): = $137,500
Operating Expenses: -$27,000
Net Operating Income (NOI): $110,000
Debt Service (loan payment) $2,500 X 12 months = $30,000
Annual Dollar Income (Before Tax Cash Flow) = $90,000

If you had put $90,000 down, you’re cash on cash return is 100%

Capitalization rate (cap rate) is calculated differently and is often used by investors to calculate the value of a real estate investment.

Cap Rate = Income / Property Value

In real estate, appraisers might use a cap rate to value investment property. So if similar recently sold buildings have cap rates of 8% and a property has a NOI of $24,000, then the property is valued at $300,000. Often appraiser don’t know the NOI of recently sold properties so they must rely on other appraisal methods as well.

So a duplex valued at $200,000 and netting $20,00 has a cap rate of 10%.
Investors will use a cap rate to value a property when making an offer to purchase. For example, if they want a rate of return of 10% and a property is netting $20,000, then they will pay no more than $200,000 for it.

Contact me if you’re thinking or have questions about purchasing a duplex or multi-unit building in Burlington, including questions on duplex down payment assistance.

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You can reach Pike at 802.233.2600 or pike@castleporter.com.

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