Case Study: Flipping a Duplex to a Single-Family Home | Think Realty | A Real Estate of Mind
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Case Study: Flipping a Duplex to a Single-Family Home

How I Enjoyed Five Years of Waterfront Living as Owner-Occupant of a Mismarketed Duplex, Updated, Converted it to Single-Family, then Made a Tidy Profit

As an investor and a person who loves the water, when I read about an open house for a duplex that has water access and a deeded dock for $109,000, I sat up and took notice. When I read on to see it has an attached double garage and a second building that is the equivalent of a five-car garage with a loft above it, I got in the car and went to take a look.

What I found was a large house, surrounded by higher-priced single-family homes, that was being used and marketed as a duplex. My experience has always told me that properties that are not marketed properly tend to create some good buying opportunities, as the competition for purchase is low.

The house was a two-level, single-family home known as a walk-out rambler or ranch home. The home boasted nearly 3,000 square feet, and it had a huge in-ground swimming pool. It sat on a two-thirds-acre lot at the end of a cul-de-sac. The property had deeded boat access, and the lower level was finished as its own apartment and was occupied by a tenant. The zoning allowed for one to two units. It was marketed as a vacant duplex.

As I toured the property to see if it would be a good investment, I instantly loved the potential of the property. It needed considerable updating, but the price was right, and the upside was huge.

When converted back to a single-family home and updated, this property would demand a much higher price. The renovation would consist of simply converting the lower-level kitchen into a den or office, or even a bedroom and removing the door to the stairway.

There was no doubt this property offered a big upside.

Overcoming the Challenge

My challenge was that I had just purchased a four-unit apartment building about six weeks earlier, and I did not have the cash needed for a down payment on another investment property.

There may have been a number of creative ways to buy this property, such as leveraging other properties or asking for seller financing, but I chose the most lucrative path.

I decided to move into the property and make it my homestead and keep renting the bottom apartment to a tenant.

This owner-occupier loan would allow me to get the best possible leverage with a low down payment and the best financing terms available.

It created an economical way to live, while executing the value play. There were, of course, certain limitations on tax-deductible expenses as the owner-occupied portion of home renovations were not deductible.

I wound up purchasing the property for $99,000, and over the course of five years, I updated and renovated the property.

Most importantly, I enjoyed what people refer to as resort-style living. I enjoyed the boating on the lake, the many pool parties and the enormous wood shop I had in the second garage.

After about five years, when the tenant in the downstairs unit (yes, the original six-year-long tenant) decided to move on, I converted the kitchen into a man-cave-style wet bar and the living room into a home theater room. With that, the renovations were complete.

The updates I made cost $55,000, for a total investment of $154,000. I sold it for $330,000. This proved to be both fun and lucrative. It combined a highest-and-best-use strategy with an owner-occupied investment strategy that I highly recommend.

It is important to note that tax rules that apply to these investments may vary by individual circumstances and state taxation rules, so check with your CPA. The basic idea is that the benefits are great and can also create great upsides.

Over the years, I have done a number of these owner-occupied and highest-and-best-use strategies, either personally or assisting others to do so.

Five Benefits of the Owner-Occupied Investment

1. Lower interest rates, higher cash flows

With an owner-occupied property purchase, you have access to the best interest rates possible, which can increase your cash flow and overall returns. Loans for non-owner-occupied properties are more expensive.

2. Homestead credit and higher cash flows (reduced property taxes)

Note: Homestead credit for owner-occupied, two- to four-unit buildings are fairly common, but rules do change from county to county or state to state, so you will need to add this to your due diligence if you decide on such a strategy.

3. Lower cost of living

With a tenant paying part of the house payment, your living expenses are reduced drastically. In this property, my tenant paid 60 percent of the expenses while only occupying 40 percent of the property size. This freed up money for me to do updates and renovations.

4. Room for do-it-yourself renovations and larger ROI

Typically in an owner-occupied investment, you have the luxury of more time, so I was able to do most of the rehab work myself. It was something I enjoy doing, and I did not feel rushed to complete the work.

5. Higher-quality tenants with lower management cost and higher cash flows

When tenants know their neighbor is their landlord, you tend to attract better-quality tenants. Because you live in the building, your management costs are eliminated because you are right there to take care of issues as they arise.

With these benefits, I have been able to help many beginning investors acquire their first properties. It is a lucrative and affordable way to get started. It also provides for a great value play for investors who want to move up to bigger and better homes.