Have You Considered a Duplex?

By Jeff Stewart, CCIM 

One of the best strategies for young people to begin in real estate is with a duplex.  We bought our first one almost forty years ago for our first home in Austin, Texas.  I often encourage young people to consider starting home ownership with a duplex for several reasons.

First, the most obvious reason is to have someone else help make the payment.  Second, and this is no small thing, it provides valuable property management experience in a low-risk environment.  Management hassles are much easier to deal with when the owner lives on-site.  Third, it paves the way for future rental acquisitions.  Lenders prefer investors to have property management experience.  By renting out the other side of a duplex for a few years, should satisfy that requirement. Lastly, owner-occupied financing is generally easier to obtain and has slightly better terms.  By purchasing a duplex for a personal residence, a novice investor is able to obtain financing that most of us established investors canl not.  Later, the duplex owner can purchase a regular house for their next home and keep the duplex for investment income.

People often ask what I look for in a duplex. I admit I am very picky.  I love those areas of well-maintained duplexes where they are managed as one complex.  Conversely, few things are as disappointing as those same areas once the ownership has been split up and each duplex has different management.   These situations generally slowly degenerate.  The far south end of Westgate Boulevard in South Austin comes to mind.  My preference is a random duplex or two surrounded by single family homes.  Of course, that means that the duplexes must be well-kept in order to not be an unwelcome sight in the neighborhood.

In addition, I look for structures which were built to be low maintenance.  Materials such as the old Masonite are common on most duplexes and there are only two types of Masonite . . . that which has rotted and that which is going to eventually rot.  Also, I prefer hip roofs to gable roofs for the longevity of the paint job and the energy efficiency.  It is not a huge consideration, but I also watch out for problem areas like thin-set tub enclosures and previous code violations.

So how does a novice determine the value?  Well, it is not simply a positive cash flow as some residential agents like to advertise.   For many years we used a gross rent multiplier of 100.  It made for simple math.  $500 rent on each side totaled $1000.  $1000 x 100 = $100,000.  While no substitute for a profit and loss statement, this provided a quick acid test.  More recently as returns on most investments have trended downward, we have seen the gross rent multipliers increase to something more like 114 -120.   We have also seen the prices on duplexes climb for the very reason I am advocating here . . . homebuyers are now largely driving the market and unlike pure investors, they are not as focused on return on investment.

So what are the caveats? Primarily, legal pitfalls and liability are where beginning landlords run into trouble.  New landlords need to make every effort to educate themselves about fair housing laws, insurance needs, and lease contracts.  There is a lot to learn.  In the past, I have suggested that some of my clients consider joining the Austin Apartment Association.  They do a great job of educating their members and keeping them abreast of legal changes.

In closing, duplexes are a reasonable way to start investing and a sensible way to make homeownership affordable.  A duplex was the first thing I built when I launched my building career in 1978.  We still have it and I have no idea how many times it has paid for itself . . . a lot.  If you have questions about duplexes or other residential properties, feel free to contact me.

Jeff Stewart, CCIM   speakingofaustinrealestate.com

jstewart@stanberry.com   Stanberry Commercial

Time for Property Tax Reform by Jeff Stewart, CCIM

It is time to rethink property taxes. The current laws are finally placing an unfair burden on the shoulders of Texas homeowners. I have been slow to come around to this point of view, but the time has come to get a new perspective.

As a longtime builder/REALTOR and property owner, I have backed the industry line about property taxes.  As a board member of several local and national trade organizations, I have lobbied for the system to remain the same.  It now occurs to me that I was part of the problem and now it is time to look for new solutions.

As a Texan, I have always agreed with the privacy component of our State’s real estate law.  Many other states require full disclosure of sales prices, but not Texas.  We proudly argue that we are defending the privacy of property owners, when in reality we know that we are trying to keep actual sales figures out of the hands of the local county tax appraiser. So which is it really . . . privacy or tax values?  Some of both, but the time may have come to give up a bit more privacy in the name of equitable taxation.

The cornerstone of property taxes is that the values be equitable.  This is where I think we have failed.  The Austin American Statesman and the Austin Business Journal routinely publish articles about multimillion dollar buildings that have sold.  Occasionally the sale prices are made public because of the institutional buyer or seller. I have seen numerous cases where the sellers had recently gone to court to get a jury to lower the county appraised value . . . much lower than what they listed the property for when they were ready to sell.  This is where the system is broken.

Recently property owners across Central Texas have been up in arms about the new appraised values.  While the Travis County Appraiser told the Travis County Commissioners that values had increased an average of 16%, I can provide numerous examples of increases of more than 100%!  Some may be accurate and some may not.  That is where I see the main problem.

Thousands of taxpayers will no doubt protest the recent appraised values.  Some may get satisfaction in the preliminary informal meeting with the tax office personnel.  Others will continue on and present their case to the appraisal review board (ARB).  Most homeowners will represent themselves and grudgingly accept the final ruling of the ARB because they cannot afford to do anything else. The large, well-represented, institutional investors, however, have the financial wherewithal to take the next step and go to court with hired guns and appeal to a jury.  Almost no homeowner in our area can afford the expense of suing in District Court.  That in of itself causes and inequity in the system. Realistically, small property owners do not have the same recourse.

 As a commercial and residential broker, I regularly have out of state clients express shock at our property taxes.  While we are attractive to outsiders for not having a state income tax, we are also getting a reputation for outrageous property taxes.  We have largely done this to ourselves.  The last few years almost every ballot has had some sort of property tax benefit for some special property owner: wildlife valuation, historical, family farm, retirees, wounded veterans, and so the list goes. No doubt, all have some good reason for our support; but the rest of us have to pick up the slack.

The time has come for more public discourse regarding a more equitable form of supporting our schools and local government lest we increase taxes to the point that some people cannot afford their current homes.  Do not misunderstand . . . I do not have all the answers. I do think, however, that the first step should be full disclosure of sales prices. The next step would be to seek an additional form of revenue that is more broad-based and could provide some property tax relief, but does not create another expensive bureaucracy.  Any such movement will have to come from the public.  With the current political mindset of “no new taxes,” politicians are all too happy to proclaim that they have “held the line on taxes” knowing full well that increasing property values have increased taxes while giving them political cover.

Let the discussion begin!

Jeff Stewart, CCIM     Broker / Associate

jstewart@stanberry.com

Stanberry Commercial