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REDDIT reader wants to know whether to buy negative-cash-flow triplex

Posted by John Reed on

A REDDIT real estate investing member posted this question.
“I am planning on purchasing my first property. I am a registered nurse but have always dreamed of getting into real estate investing. I have found a triplex and am wondering if it would be a good investment. It is $180,000 in Arkansas. All three units total are bringing in $2000/month for the current owner. It doesn’t need any renovations at the moment. I plan on putting $15,000 down. Insurance is roughly $2000 annually. Taxes roughly $2400 annually. Renters pay utilities. The triplex is 15-45minutes away from several cities including Little Rock, Conway, Vilonia, Greenbrier, Cabot. Would this be a good start for me? I was planning on living on one of the units initially too. Yall please be nice to me as I am a total newbie with this kind of stuff. I hope this all makes sense. Thanks yall :)“

Reed answer:
Assuming your facts are correct, your operating expenses will likely be 45% (typical nationwide expense ratio) x $6,000 total rents = $2,700/month. Your mortgage will be $180,000 - $15,000 down = $165,000 mortgage. The payments on that are $1,070.19. That leaves you $2,700 - $1,070.19 = $1,629.81 a month. The price, $180,000 for a triplex also suggests the property is in a bad neighborhood.
I bought my first triplex in 1972 211 Lakeview Drive in Collingswood, NJ. It still exists. Redfin value today: $415,000. It has been turned back into a single-family house.
That is so unusually profitable that I suspect it is in a high-crime neighborhood. You did not list the city.
You say $2,000 a month rent for each apartment, or maybe all three units total is $2,000. The median apartment rent in Arkansas is $637. So if redo the number where total rent from all three apartments is $2,000, we get 45% x $2,000 = $900 a month net income which is not enough to pay your mortgage.
So you are paying $107.19 a month to be the owner of this. Is that wise? Depends on how much, if at all, the building appreciates. That is usually the case.
Should you buy it? We can’t tell. My advice would be to buy the most expensive single-family house you can afford and move into it. That gives you a couple dozen advantages that even an identical house that you rent do not give you. One is IRC §121 which lets you exclude $250,000 per spouse. If you go bankrupt, your creditors get 0% of the equity if it is your principal residence; 100% of your equity if it is rented. You also can probably get better mortgage terms on a single-family principal residence than on a triplex where you live in one of the apartments.
The main problem with the triplex is that it has tenants. They can cause problems including disastrous ones like lawsuits. You would be the landlord. The plaintiff would likely be your tenant. You’re the defendant. Your juror“peers” are more likely to be tenants than landlords.
Simple is better than complex. Tenants are an unnecessary complication and the bane of landlords. Many landlords reading this are nodding. Many novice landlords are thinking I am exaggerating. So become a landlord and you will find out soon enough which is correct.

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