Buying a Duplex for the First Time

Iqbal 

Hello, we’re back at Wealth Chakra, with Shreya, and Ike. And we’re going to do keep it short. This time, we’re gonna actually talk about a really interesting journey for Shreya, as she puts into, play her first investment, so Shreya, I know you’ve been looking for some time to do your first investment in real estate. And you’ve been looking at smaller and smaller rental properties. So tell us a little bit more about that.

Shreya 

As I mentioned, last time, I, the goal at the end of my day is to get into commercial, but I wanted to get my feet wet with, smaller properties. And so I had been looking, since January, the main markets that I identified were Austin, Fresno, and then Orlando, actually, because I had just looked at the income growth, population growth, and like, overall, you know, cash flow expectation. And what I found was Austin, cash flow was basically zero negative, it was not possible to do it there. Of course, property values would appreciate it’s, I think, the second most after Boise year over year appreciation, so it was very, very competitive at the time when I was looking, even before now it’s slow down, I think, because interest rates are starting to go up, but then it was, so hot things were selling like 30% above asking. So, as an investor, this might not be the best place to start off eventually, I do want to buy Austin, but you know, for somebody who doesn’t have a lot of money, that just didn’t seem to be a smart decision at the time. Then I was in Fresno, which is a an hour away from the city very rapidly growing barrier property. Again, property values aren’t that expensive, but still expensive, because it’s and so decided to start looking there as well. And then Orlando was another one where I was actually looking at Airbnb, because in Florida, there’s a lot of  more laxer restrictions on short term rentals, specifically this area, Kissimmee, which is in 10 minutes away from Disney World, so a lot of attractions there. And so I was looking at Airbnb and how I can use that as my parlay into into investing. But long story short, what ended up happening was, my parents at the time, are actually selling a Florida property up in very northern Florida as a 1031. Exchange. So that and, we can talk about what 1031 is, but that just seemed in my head as the perfect opportunity to get into this space. Because as a young investor, a lot of times you don’t have the best credit score, because you just don’t have enough credit histories for banks, or even being really smaller banks to be able to give you that loan, right. And even then there’s lots of hoops that you have to jump through. And in that market, those markets I was looking at all the way the markets were really just cash offers really strong above asking cash, somebody who’s coming with financing is not going to be the strongest just because it’s residential, because people are actually looking live, they’re not invest there, those areas were really desirable for people to live. And when people have that emotional connection, they’re not going to, you know, find out that or if they can afford it, they’re going to be cashed. So I you know, find it really hard at my age to get a loan. And then of course, there’s another way to do it, which is private money lenders, where you kind of go to your circle of investors, friends, family, and tell them to Hey, be the bank, I’ll pay you interest on it. Of course, because there’s a higher risk, the interest would be a lot higher. So I ended up thinking to myself, my first deal doesn’t have to be my own, I can partner with somebody, and that’s what, it’s the principle of other people’s money, right? So every investor they’re gonna meet, and they’re gonna say, Well, I don’t have any money, what am I going to do? There’s always an opportunity to bring the deal to somebody, have them pay it. And because you did all the groundwork, which is kind of kind of wholesaling, but not really. You will, you can make a case to get some piece of the pie basically, because you did the work. It’s their money. So that’s the kind of approach that I found and of course, they are my parents. 

So that’s what ended up happening. So what happened then was we found that property I had identified, you know, similar markets the time, but I really found Denison, Texas, to have a fairly strong market in cash flow. And Denison is about an hour north of Dallas, kind of close to the Oklahoma border. And that was the the one that we identified as one that had like the strongest cash flow, because in this time have such a market like such a really strong market with with growth. I found it smarter in my head to be going after the cashflow, rather than the chance of appreciate because things are already selling at a premium. Do you have anything? Do you agree with that, like that was the right approach? 

Iqbal

I’ll tell you what cash flow using cash flow as your criteria in order to get a deal. It’s always a good thing to do regardless of the market. Right? Because the appreciation is really something that is going to be based on where the market is going where it is today. And you can never really be 100% sure about that. But if the cashflow equation works out, and what is cash flow, right, cash flow is basically the income you’re getting the the entire income you’re getting on that property minus all the expenses, right? And we’re talking about every single expense, we’re talking about any mortgage, if you have a loan, any property tax, any insurance costs, even putting a little bit aside as reserves for any maintenance issues that might happen. You do all that after and everything leftover is cash flow. So if that cash flow figure seems good to you, right? If you think that that is, it’s almost like making dividends on a dividend paying stock, right? But the difference is now you actually own a hard asset versus just paper stock. So cash flow is always a good way to decide something. And in this market, especially. So kudos to you for that. Tell us a little bit more about Dennison, what I know you mentioned, it’s a cash flow, strong market, one hour north of Dallas. But what is happening in Dennison to make you think that it’s going to remain a good, solid safe investment area.

Shreya

So one thing is there’s the the TI manufacturing plants there, they’re moving in into Texas Instruments that you know what they make calculators, and so many other things are moving the entire plant over there. And that was kind of the main reason that I was looking at, you know, and that’s how that’s how I see there’s going to be growth in the market, there’s going to be an increase in population, and there’s gonna be increase in jobs. And that’s the main thing that people should look at when deciding where to invest. Because when there’s no people, no jobs, then people can’t pay the rent. And you know, that’s so that’s the main thing is looking, there’s also another there’s lots of it’s an up and coming rural, it’s a rural part of Texas, but I think it is coming. And that’s why you always want to buy it when it’s not the hottest city because then prices have gone through the roof. But this was a new construction that we found. So it was brand new, which was also another benefit. Because, you know, when we’re talking about repairs, and maintenance and things, things that you have to consider is if a fan breaks or the fridge breaks or something like that, that’s that could be a month or two months of cash flow right out the door. Right, right. But because it’s construction, the risk mitigation that I found was just a lot better for it. For the cash flow perspective. Yeah, that’s what you know, I found and because it is not a Dallas or it’s not a Frisco or Plano, it’s not a big city yet. I think it’s gonna grow and the fact that it’s not grown yet, and the fact that there’s major employers that are setting up offices there made me think that it would be a good investment to buy before it gets hot, right.

Iqbal 

I’ll just add to what you just said, everything you described, is classically termed this path of progress, you want to always buy in an area that isn’t the path of progress where things are happening. There’s economic growth, there’s population growth, there’s job growth, obviously, and, and things are happening in that specific area itself. Where you’re buying so what you know, I know you’re buying I think a brand new construction, is that right? So what what is it what is happening in that specific, you know, that that one mile radius that makes you confident that even within Denison you’ve chosen a good area?

Yeah, I think because of the fact that so this was a new construction and there’s more new construction around it. So this was not the only sponsor that was the thing inside that one mile radius, there was multiple sponsors building which just tells that they kind of you kind of think to yourself like they’re doing all the work right. The sponsors obviously are going to buy the land hoping that’s going to appreciate hoping that they’re going to sell to investors like us or or just you know, People that are going to live there. And if multiple people are doing the same thing that just tells me that their research, whatever they have decided, is a good thing for me, right. And of course, in the same things is happening in Austin and really everywhere, right, so many people are constructing there. And if you kind of see a trend, then you know that something bigs about to happen. But in the case of Austin, it’s already so hyped up and already selling at such a premium that just doesn’t make sense for their primary goal is to sell to homeowners that are actually going to live there. And in fact, you cannot sell to investors. And that was another thing that I found really hard in Austin and these these, these markets that those builders specifically don’t sell to, and if they find out that you investor, first of all, they’re not going to give you a mortgage. And if you do the financing through them, it’s a it’s a fraud. And they specifically are really anti because their goal is to build a community and not just people that are renters, right, because it is another way to look at it. So yeah, I think you know, I just want to wrap up Lastly, by saying exactly what the 1031 is, because I know we kind of glossed over it. And before

Iqbal 

we can do that, let’s, let’s instead talk about the fact that he bought a duplex, because I think that’s important. Why did you buy a duplex?

Shreya 

So simply put, it just reduces your risk of vacancy? If you have two units that are, you know, rented out and wanting to leave, you still have 50% of the cash flow, one unit, no renter, you have 0%? So that’s just the that was the process behind it. And of course, there’s

Iqbal 

no because it’s a good process, because your investment is always going to have fixed costs, right? Whether you have somebody in the unit, renting or not, you always have to pay the fixed costs, property tax, insurance, etc. So when you you mitigate your risk by having two tenants in two different units. Now, even if one is empty, it leaves your meet meaning some of your costs with the other tenant.

Shreya 

Yeah. Good. Yeah. And that’s the that’s the whole philosophy behind, you know, really big apartment complexes, like I was talking to one of my investor friends, and I was like, Don’t you think it’s scary to buy such a big asset? And he’s like, I think it’s scary to just buy one unit? Because if you have, if you have no tenants, like isn’t that scary to use? Like that’s, you know, you don’t think about it, because you’re thinking of it as a really small thing. And it’s like, small lesson lesson, but it’s actually a lot more riskier than buying a really big building, right? In terms of cash flow, vacancy, and stuff like that. So the last part of it is what the 1031 actually is. And so the 1031 is a the tax code, basically, that the Congress and IRS introduced, I think, the 1920s, that allows investors to defer their capital gains tax if they buy another, like property with those funds. So that’s exactly what we did. The Florida property was an investment property, I think it sold for about 250. And took those funds, put it into this, there’s an intermediary, and then you basically use that to fund your next property and then pay the difference. If there is it has to be more.  And I think it’s really interesting to think about it, because usually, we think of taxes as a bad thing. And you know, the tax code is something that lots of people don’t like, but really, really savvy and successful investors actually make the tax code their friend and know how to work around it. Right. So I’m sure you would agree.

Iqbal 

Right. Yeah. Good. Well, wonderful. Okay. Anything else you want to share share before we wind up?

No, yeah, this was a great discussion. So thanks. I hope that the listeners found it helpful. But yeah, we’ll come down here next week. And talk about more interesting things. Absolutely. All right.

Shreya 

All right. Thanks, everyone. Bye