Is Investing in a Duplex Right for You?
Breaking Down the Pros & Cons
Lately I have been asked about investing in Duplexes more than ever before. Most likely due to the shortage of rentals and the ability to get a strong ROI. I think it’s a great wealth-building investment, but it’s not for everyone. Here are the pros and cons of buying duplexes as an investment strategy, and how they’re different from single-family homes. We’ll also discuss the key to successful duplex real estate investing.
WHAT IS A DUPLEX?
A duplex is basically a two-for-one home. Duplexes are often side-by-side and share a wall or stacked on top of each other. It’s also called a multifamily home as more than one family can live in it. When a buyer purchases a duplex, they’re essentially buying two homes.
PROS & CONS OF INVESTING IN A DUPLEX
Let’s say you’re considering buying an investment property and have decided on investing in a duplex. Naturally, you’ll want to weigh the pros and cons of owning a duplex and make sure this is the best type of property for your ROI goals. We’ve put together a comprehensive investing in duplexes pros and cons list to make it a little easier. Let’s start with pros…
Investing in Duplexes Pro #1 – Great Monthly Cash Flow Potential
The unique thing about investing in duplexes is that it provides options to the owner. You can choose to live on one side of the duplex while renting out the other side or rent out both units. Renting out both units will produce monthly cash flow. And if you’ve taken the time to do your homework and snagged a great deal, it’s likely the combined rent from both tenants will cover the entire mortgage and then some. This makes owning a duplex potentially very lucrative.
Investing in Duplexes Pro #2 – They’re Affordable – Two Units in One Transaction
A duplex is typically (not always) more expensive than a single-family home, at least in the beginning. However, you’re getting two units in one transaction, which makes them extremely affordable, especially long term.
Another reason duplexes are so affordable is their location. More often than not, duplexes are located in very affordable neighborhoods. Additionally, you’ll be getting rental income every month, making it even more affordable. More on that in
Investing in Duplexes Pro #3 – Live Free or Cheap While Tenant Pays Your Bills
One of the most appealing parts of investing in a duplex is the ability to live for free or cheap. Living in one side of the duplex and renting out the other can potentially cover or lower your mortgage each month.
For example, let’s say the mortgage on your duplex is $1,500 a month. And you rent out the other half for $1,000 per month. Then you’d only be paying $500 a month while your tenant pays the rest. Or you can make double payments and pay off your loan quicker and start earning passive income.
Investing in Duplexes Pro #4 – Relatively Easy Financing
If you’re wondering if it’s more difficult to get financing for a duplex than a single-family home, the short answer is, no. It’s relatively easy to get financing to purchase a duplex. The most common methods of financing include cash, conventional loans, FHA loans, VA loans and 203k loans.
As we are talking about investing in duplexes, I want to share a few details on 203k loan requirements and why they could be a great option for many investors. A 203k loan is considered part of the FHA loan family, but with some unique features. For starters, 203k loans allow buyers to include the cost of repairs into the loan.
For instance, if you’re looking to purchase a duplex for $120k, but the property needs around $30k for repairs, this type of loan allows buyers to borrow $150k. The same is true for triplexes and fourplexes, etc. Keep in mind that because this is an FHA program loan, 203k loan requirements include a 3.5% down payment and living in the property for a year.
Investing in Duplexes Pro #5 – Relatively Easy Leasing
There are a few reasons duplexes can be easier to find renters. The first is, duplexes are usually bigger and have more of a “home” feeling, especially compared to apartments. Tenants only have to share a wall, floor, or ceiling with one other tenant, reducing noise and other possible disturbances.
If you’re living in one half of your duplex, tenants often prefer having their landlord nearby, in case of emergency repairs or urgent issues. And, landlords in such close proximity can keep an eye on the goings-on and condition of their investment property. A win-win!
Investing in Duplexes Pro #6 – Take Advantage of Landlord Tax Deductions
Did you know that investing in a duplex as an investment property qualifies you for several additional tax deductions? Whereas single-family homes don’t offer the same tax breaks. Duplex owners can deduct most expenses for maintenance, yard work, and repairs. To see a full list of tax deductions on your income property, check out the
Top 18 Landlord Tax Deductions to Maximize Your Profit.
Tip: Renting to family members disqualifies you from several tax deductions.
Investing in Duplexes Con #1 – Rental Income Isn’t Guaranteed
While buying a duplex as an investment property is a great idea until…you can’t find renters. Then you’re faced with having to cover a larger-than-expected mortgage payment.
Hopefully, you ran the numbers before buying the property and can afford to cover the entire mortgage (for up to 3 months), in case vacancy issues occur. Just because you expect rental income, doesn’t always mean your duplex won’t go unoccupied for one to three months a year (on average, depending on your market).
The trick here is taking the time to find the right tenants. Good, quality tenants are worth every minute or dollar spent.
Investing in Duplexes Con #2 – You’re Responsible for Repairs & Maintenance
When you buy a duplex, unless you’re planning on hiring a property management company, you’re basically signing up to be a landlord. Even though it’s only one unit, there’s still potentially a fair amount of work and time that a rental requires.
What if your tenant’s oven stops working and you have to purchase a new one? What if part of the roof is leaking and needs to be fixed? All of these unexpected expenses will cut into your rental income.
Make sure you’re willing to take on that extra time and money before buying a multi-unit property. Otherwise, budget for the cost of hiring a property manager.
Tip: Most repair and maintenance costs are tax deductible, as mentioned above.
Investing in Duplexes Con #3 – Potentially Share a Wall with Your Tenants
Sharing a wall with your tenants may be enough to dissuade potential investors from buying a duplex. If you’re easily annoyed by noise or have a tenant who constantly knocks on your door with complaints, a duplex may not be for you.
However, as a landlord, you get to choose your tenants. So, if you find great tenants, these issues are easily avoidable.
Investing in Duplexes Con #4 – You Could Get Stuck with Bad Tenants (If You Don’t Choose Wisely…)
Even if you spend the extra time and money looking for quality tenants, it’s not always a guarantee they’re actually going to be quality. If you end up with bad tenants, it could make your living situation a nightmare. One of my latest articles provides tips on finding great tenants, Owning Investment Property: 3 Potential Pitfalls & How to Avoid Them.
INVESTING IN A DUPLEX VS. SINGLE-FAMILY HOME EARNING POTENTIAL
Real estate investors often compare different types of properties to try and determine which will help them reach their financial goals. In this instance, let’s consider a duplex vs. single-family home investment.
To start, a vacant single-family home will affect your monthly return on investment much more than a duplex. Whether you’re living in one side of the duplex and renting out the other, or renting out both units, the chances of both units being unoccupied at the same time are unlikely. With a single-family home, you are responsible for 100 percent of the mortgage if left vacant.
On the other hand, property insurance for a duplex is typically 15 to 25 percent higher than single-family homes.
As mentioned earlier in the article, duplexes usually cost more out the gate than single-family rentals. There is more demand for SFRs than duplexes, so selling a duplex could take longer than expected. However, duplexes produce more cash flow over time, which is appealing to buy-and-hold investors.
ROI Potential
Whether we decide to buy a single-family home or duplex, all investors are looking for the best return on investment. The key is to figure out which will generate a better long-term return. Many factors go into your ROI including, property condition, appreciation potential, and how well tenants care for your rental.
THE BOTTOM LINE
As a first investment property, duplexes can offer a wide range of advantages as discussed above. What’s important to remember is buying an investment property is all about buying a quality property. Do your homework, crunch the numbers, and ensure your investment has the potential to create the greatest return.
4 QUESTIONS TO ASK BEFORE BUYING A DUPLEX
- How Much Do I Want to Spend?
- Location, Location, Location! Where Do I Want to Buy?
- What Condition Do I Want My Property? (Move-in Ready or Fixer-Upper)
- Do I Want to Live in My Duplex or Rent Out Both Units?
CONCLUSION
After comparing the pros and cons of investing in duplexes, hopefully you have a better idea of which type of property to invest in. Buying a duplex as your first rental property can be an excellent route for new investors, especially if you live in it. Remember, buying real estate is all about finding a quality property in strong markets.
Aristotle Kumpis, Realwealth
