There are times when single family homes in an area are selling for more than duplexes that have the same square footage. It isn’t necessarily common, but it happens, and when it does, you can make some money. Just make that duplex into a single family home.
Changing the structure of a house will often mean surprises. However, it is generally easier to convert a duplex into a single family home than to go the other way. If it was a single family home at some point in the past, it may require just the removal of a wall and a few minor modifications.
Making Duplexes Into Single Family Homes – An Example
First, you have to make sure that it makes sense. It normally will only work if the housing prices in an area have gone up much faster than rent. This is because the price of a duplex is often based on the income, and so it may sell cheap on a square-footage basis, when compared to single family homes.
Suppose you find a neighborhood where 3-bedroom houses are selling for anywhere between $210,000 and $260,000. You notice that there is one duplex left. The zoning no longer allows for duplexes, but this one was built when they were allowed, and so is “grandfathered.” It is run down a bit, and it looks like one unit is empty at the moment. That tells you that their may be an owner who is tired of being a landlord.
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You find the owner, and see if he has any interest in selling. He does, and shows you the place. You see that you can convert it into a 4-bedroom home and it will actually feel like a “normal” home when you are done (sometimes there is no hope of this). You set up another time to walk through with your contractor friend, who can put a price on the conversion for you.
Meanwhile, you do some research and talk to a real estate agent who is active in the neighborhood, to determine what the house will sell for when finished.
After seeing the property again with the contractor, you add up your costs for everything, including the costs of buying, converting, holding and selling. It comes to about $50,000. You subtract this from the projected sales price of $260,000, which gives you a figure of $210,000. From this you subtract the $30,000 – the profit you decided on.
$180,000 is the most you can pay for the property then. Based on the current rent of $675 per unit (assuming both units were rented), and the current expenses, and the usual cap rate of .08 for investment properties in that area, the duplex is worth just $140,000. You show this to the owner on paper, and suggest that you can pay more than that, maybe even $160,000.
He knows that the real value is in converting the property, but he doesn’t want to do it himself. He agrees to sell it for $175,000. This means that if all goes well, you will make a profit of $35,000. Of course since all rarely goes well in a project like this, you’ll probably make closer to $25,000.