I’m done with the stock market. Should I buy a duplex instead?

Excellent question. May I answer you by giving you a real world example?

This is a property I bought and held for 11 years. Following are two Pro-Formas – one describing the financial picture when I bought the building and one describing the financial picture when I sold it.

Here is a brief description of some of the terminology used below:
Net Operating income ( NOI ) = income less expenses ( does not include mortgage payments )
Debt Service = principle plus interest on loan
Cash on Cash Return = NOI – less debt service / down payment + capital improvements Cap Rate = NOI / sales price ( cost basis )

741 Florence
  : Up and down duplex, new siding and roof, separate G + E and water , 2 new furnaces. Tenants pay G + E. Residential neighborhood.
income: 900/mo (1st fl 1 bedr = 375, 2nd + 3rd fl 2 bedr = 525) = 10,800
taxes: 2051/yr
insurance: 351yr
maint/repair: 600/yr
water: 1,061
Net Operating Income: 561/mo = 6737 yr
Purchase price: 42,000 Down payment: 5,000 Loan: 37,000 30 yrs, 8 % Debt Service: 271/mo ( principle plus interest ) Cash return: 290/mo = 3485/yr Cash on Cash return rate = 70% Cap Rate = 16%

741 Florence   : Up and down duplex, new siding and roof, separate G + E and water , 2 new furnaces. Tenants pay G + E. Residential neighborhood.
income: 1,000/mo ( 1st fl 1 bedr = 450, 2nf + 3rd fl 2 bedr = 550) = 12,000
taxes: 2246/yr
insurance: 351yr
maint/repair: 600/yr
water: 1,061
management: 840
Net Operating Income: 575/mo = 6902 yr
Purchase price: 72,000 Down payment: 15,000 Loan: 57,000, 20 yrs, 5 % Debt Service: 376.17/mo Cash return: 200/mo = 2400/yr Cash on Cash return rate = 16% Cap Rate = 9.5%

Let’s discuss this for a moment. First of all, when I bought the building the market was different than it is today. Notice I only put down 5%. Today you would be required to put down 20%. The only thing that would change materially is the cash on cash return. Also, interest rates back then were much higher than they are today. Also, please notice that when I bought the property I didn’t have property management. Big mistake. I later, wisely decided to use Property Management. I actually make more money using property management. They’re better at dealing with tenants and repairmen than I am. I’m better at finding more properties to invest in. The women who bought this got a good deal. I got a
great deal. Everybody wins!

The bottom line is this :

1. I put up $5,000 of my own money
2. I made about $3,000 per year positive cashflow ( actually it improved over the ten years I owned the building but I’m being conservative here.
3. I got to take the IRS depreciation write off of 3.5% every year of ownership(assuming a 15% tax bracket this roughly equal to an additional $15,400 )
4. The mortgage was paid down by $5,000 over the eleven year period and this was of course covered by my rental income
5. The building went up in value
6. I sold the building for $72,000 after 11 years ( difference of $30,000 )
7. When you add it all up I turned $5,000 into more than $70,000 in 11 years and that doesn’t include the tax savings from depreciation !

Should you buy a duplex? I did. In fact I bought a lot of them. Do I have money in the stock market? Not anymore. For me the difference comes down to control. There are basically only two moves you and I can make in the stock market – buy and sell – and we have no control whatsoever over that underlying asset in between the buy and the sell. With real estate, I can not only buy it and sell it, but I can modify it and improve it. I can raise the rents. I can refinance it and use that leverage to buy more property. You see with real estate I am in control. I’m 49 years old now and I have learned the hard way that whenever I give up too much control it cost me money. The more control I retain, the more money I make.

Investing in Real Estate is not very glamorous. It takes time and energy and in today’s market it takes money. Yes you can buy real estate without any of your own money but today it’s easier if you use your own money. The banks will give you the best rates and terms when you use your own money. I know this runs contrary to a lot of what you read and watch on late night television but it is the simple truth. Take the path of least resistance. There are several ways to buy Real Estate and only 2 basic ones – the way implied above and the other way which is buy wholesale, remodel, refinance. The banks are not looking favorably on the latter approach these days. Actually, some lenders will finance your purchase and remodeling at the same time but you still need 20% down!

I hope this example sheds some light on what many perceive to be a little mysterious. It really isn’t magic. There are no secrets. It is actually quite simple. I have one friend who didn’t finish high school and she owns over 100 units free and clear and she did it in 15 years ! In a little over 10 years I managed to get my name on 250 units and I am regular guy. I drive a pickup truck with over 130,000 miles on it. I pack my own lunch. I did the corporate corporate America gig for 18 years and I hated it. I had no freedom. My spirit was dying. Now I love my freedom and independence and I thank God every day for real estate because every time I bought a little piece of real estate I also I bought a little piece of freedom. God Bless America and God bless you for reading this article. I sincerely hope and pray it will help you see a real world alternative for investing your hard earned dollars.