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Is a non-conforming duplex a good real estate investment?
Today we’re going to explore briefly this topic, as it’s something that comes up all the time for us here at Keyrenter, as we have different investors and landlords that are exploring options and trying to see where they can get the most bang for their buck. So. let’s first answer the question. What is a non-conforming duplex, or a triplex, sometimes? There’s different plexes that can be non-conforming.
Here’s just an example. Here’s a property that is meant to be a single-family home. Okay? This is just a normal, split-entry home. Okay? But what happened is, the landlord, or the investor, converted the basement here, into its own apartment. One of the things that makes it non-conforming, though, is the zoning of this area isn’t zoned multi-family. That can be one thing. Also, there’s only one gas meter, one power meter, and sometimes, oftentimes, one furnace, one A/C unit, because it’s meant to be a single-family home. That’s why it’s non-conforming. There’s also one entrance. Typically, the basement entrance is around the driveway here, and in the back or on the side. Sometimes you can wall it off and have it be in the entryway. But it’s basically, taking a property and a home that was meant to be for one family, and converting it into a duplex.
Why would someone want to do this? Well, the logic here, the theory, is that if we have two units, we can get more rent. If we rent it out that we can get less rent if we do it to one family, but if we … Or one individual, one tenant. But if we rent them out separate, we can get more rent. Ultimately, that’s what they’re trying to accomplish here.
So, I want to just talk about this briefly. From our experience, what we’ve seen, with investments that we’ve managed, that we’ve overseen, and clients that have come to us with different situations, and investors that say, “Hey, can you analyze this property and tell me if it’s best as a duplex, non-conforming, or a single-family?” And this is what we’ve found, in most cases. There are some exceptions where a non-conforming can outperform. But this is what we typically see.
So, this is just the same property, two bed, two bath, or excuse me, two bed, one bath, on the top and the bottom. So, we’ve got two beds up, two beds down, one bath on the top and the bottom. One car garage. Utilities, this is how it’s structured oftentimes, it gets a little interesting with non-conforming. The power is up, means the power is paid by the tenant that’s upstairs. The gas is paid by the tenant that’s downstairs. Okay? The water is paid by the owner, since it’s shared, right, in a multi-family property. One of the challenges here is, especially their central air, in the summer, this is going to be a high expense, and in the winter, this is going to be a higher expense. But the control for the furnace and the central air, is going to be controlled by the upstairs. And so sometimes there is challenges with tenant conflict, where the downstairs unit say, “Hey, turn down the heat, or turn up the heat.” And there’s just this conflict of who is paying more, and for management, it can be a real challenge.
The rent in this situation, $950 up, $850 down, a total of $1,800, which is a net of $1,715, because we’ve got the water of $85 that brings down that net rent. Average occupancy 15 months, and the reason it’s 15 months is typically, in a multi-family, they’re not looking to stay for a really long time. Yes, there’s exceptions to that, but in most cases, it’s typical in multi-family to have a shorter term tenant, 9 to 12 months, usually. And the average in our inventory we’ve seen is 15 months. Average days on market, they don’t rent as fast, because a lot of people don’t want to have someone above them, or below them, or deal with the issues here. And so they can take longer to rent, which means more vacancy time. That’s what we’ve experienced. Again, there are exceptions to that.