Phoenix Duplex Investment

By: Donald Plunkett

Single family homes historically have the lowest capitalization rates ("cap rates") of any property class. This is calculated by dividing the net operating income (assuming no mortgage) by the purchase price of the property. For instance, a $100,000 property that generated $9000 per year in net operating income would be classified as a "9 cap." For single family homes, cap rates are in many cases in the range of 5 to 6% (sometimes less) with most of the return for investors coming in the form of appreciation in the value of the property. For this reason, many income investors have sought out small multi-family investments which tend to have higher cap rates. Additionally, investors like the ease and low cost of residential mortgages which are generally limited to no more than 4 unit properties.

In the Phoenix area, there is an overall shortage of small multi-family investments such as duplexes and triplexes, especially units in higher income areas. Investors coming from vibrant multi-family markets like New York or Chicago, are sometimes disappointed to find out that much of the inventory available in Phoenix is older with relatively low rents and a high level of deferred maintenance. Those looking in high income areas like North Scottsdale or the Chandler mall area will find virtually no duplexes available. Much of the small multi-family inventory is clustered around Central and North Phoenix areas like Sunnyslope, in older parts of Mesa, in Apache Junction, or in Pinal County markets such as Casa Grande and Arizona City. The one exception is Fountain Hills, which has an adequate supply of duplexes and multi-family zoned land.

There are a shortage of opportunities out there. However, investors should not avoid this investment category completely. A number of buyers who have purchased cash flow generating duplexes have sold in 2-3 years for a profit. Some of the things that went into the decision to purchase included locating units with a low level of deferred maintenance relative to peers. This might be due to a diligent owner occupying one unit. Sometimes the asking rents of a property truly are low because the occupants have been there so long and the owner is not aggressive about raising them. Investors must be careful, though, as many owners will claim their rents are low. Other things buyers looked at were low crime rates in the area, no criminal activity on the property, and each occupant being a legal resident and wanting to remain at the property after closing. Sometimes the quality of the rental income stream is particularly good, for instance, a tenant that receives a check from the government, a tribal authority or well known employer versus someone who has to always assemble cash or spare change at the last minute from unknown sources. Smart investors look at historical expense ratios and go through past income statements with a fine toothed comb rather than just taking a past owner's numbers at face value. Some newer properties in Pinal County have worked out for some buyers, especially those that knew what they were doing and acquired a bank-owned property. Though the property was less than two years old, the first owner struggled to find renters and was overly leveraged.

Investing in Phoenix duplexes is not an easy proposition nor is it ideally suited for the passive investor that is used to owning high end properties in other markets. The relatively small number of investment options lends itself to buyers that take the time to look at a lot of data and make smart purchase decisions.

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