Table of Contents
Buying a duplex is an extremely difficult and time-consuming process, often with limited information. This article provides the steps necessary to find your perfect investment property in the fastest way possible.
Buying a duplex and living in one apartment while renting the other is a terrific method to save money on housing. It’s also a terrific way for new investors to learn about rental property management. Owner-occupied investors may relocate, rent their apartment for extra income, and construct a real estate portfolio once those abilities are developed.
What Exactly Is a Duplex?
A duplex is a multifamily residential apartment structure with two distinct apartments. Except for residences with in-law apartments or property with two detached structures, these units may be positioned side by side, one on top of the other, or in any other connected arrangement. Duplexes come in a variety of sizes and room counts. The layouts might be mirrored, identical, or completely different. There may be fewer rooms, bathrooms, or bedrooms in one apartment than in the other.
The trick is that they each have their own entrance. An in-law apartment is a separate living area with its own kitchen, bathroom, and bedroom that is linked to a single-family house. Utilities are usually shared in in-law residences. A duplex might have a single electric meter and heating unit, or it can be metered separately. Legal duplexes are regarded to be two different and distinct houses under one roof.
If a duplex’s two apartments share heating and electricity, the owners are usually liable for these and any other Utilities that are shared. The expenditure may be recouped by charging enough rent to cover the charges. They’d want to make sure their rents are competitive, that they’re not overcharging or undercharging, and that they follow any state-mandated rent control if any exists.
The Benefits of Purchasing a Duplex
Purchasing a duplex and collecting rent from one property while living in the other is a terrific method to reduce housing costs. It’s also a good choice for first-time real estate investors since it’s less complicated to operate than a triplex or fourplex.
As a first investment property, a duplex provides benefits over a single-family house. In a single-family home, if a unit is unoccupied, there is no revenue. With a duplex, there is always the possibility of having at least one property leased and earning money while looking for a renter for the vacant unit.
Housing Expenses Can Be Offset
The primary reason first-time homebuyers consider purchasing a duplex is to use rental revenue to offset their housing costs—by living in one apartment and renting the other. It may be an excellent approach. Buyers, on the other hand, must take into account vacancies. If their income is insufficient to pay bills and they rely only on rental revenue, it may not be the ideal solution, since vacancies are inevitable.
Purchasing in a high-demand rental neighborhood and studying vacancy statistics in the region will help keep vacancies to a minimum. Saving three to six months’ worth of housing costs will also help you avoid a vacancy. Rents are likely to be higher in high-demand rental regions, but property prices may also be higher. Before you purchase, it’s a good idea to determine the net operating income.
Create an Investing Portfolio in Real Estate
Before exploring bigger multifamily buildings and apartment complexes, future real estate investors might try purchasing a duplex. Owner-occupied duplexes allow would-be investors to learn how to manage and maintain a rental property while avoiding the problems of juggling numerous tenants, leases, advertising vacancies, and Managing the finances of a rental property.
After accumulating landlord experience, rookie investors may either rent out their apartment or conduct a cash-out refinancing and purchase a separate investment property. When it comes to financing a new rental property acquisition, there are various possibilities, and lenders prefer experienced investors.
Learn how to manage a property
An owner-occupied duplex is simpler to handle since the owner does not have to go to another place to manage their property and is likely to be more aware of neglected upkeep. Owner-occupied duplex tenants may be more conscientious about paying rent on time and keeping noise to a minimum.
Buyers obtain property management expertise in the following ways:
- Using websites like Zillow Rental Manager to advertise job openings
- Choosing the best tenants through screening applications
- With fewer properties to maintain, developing rental property maintenance skills is easier.
- Understanding the rules governing landlord-tenant relationships
- Leases and other legal papers are written and executed.
- Managing the finances of a rental property
- Getting a better understanding of the obligations and responsibilities of a landlord
Mortgage terms that are favorable
The advantages of Owner-occupied Financing for Duplexes are similar to those of single-family home financing. Low down payments, low mortgage rates, and lengthier 30-year terms are all advantages for owner-occupied purchasers. Rental income is often used to qualify for many mortgages, enabling purchasers to qualify for more costly residences. Homeowner interest rates, which are now about 3.8 percent and 7.5 percent, are usually lower than investment property interest rates.
Many government-backed credit schemes are available to owner-occupied purchasers that are unavailable to investors purchasing homes other than their principal residence. These loans demand as little as 3.5 percent down and are often financed for 15 to 20 years. Investment property loans, on the other hand, require a minimum of 20% down and are normally financed for 15 to 20 years.
Rent out your home as an Airbnb.
If the second apartment of your duplex is in a popular area for business or leisure travel, you can try renting it out as a short-term rental, similar to Airbnb. Reunions, alumni gatherings, graduations, and visiting instructors are all chances to provide short-term rental space if you live in a college town. This also enables you to set apart periods when you don’t want tenants in your home.
Short-term rental revenue may quickly accumulate, but so can maintenance costs. Because you can’t promise you’ll always have short-term renters, rental revenue is less predictable than leasing to long-term tenants. If you want to rent out your unoccupied duplex apartment for a short period of time, be sure it’s financially feasible.
Why You Shouldn’t Buy a Duplex
Purchasing a duplex is a sensible investment for a variety of reasons. There are times, however, when purchasing a duplex is not the greatest option. Duplexes bring owners closer to their renters, need the development of property management skills, and do not guarantee regular rental revenue.
Proximity Tenants
It is not for everyone to live in close proximity to renters. When a renter sees their landlord every day, property damage, noise, and late rent may be less common. They may, however, be aware of your presence, knock on your door, and phone often and at inconvenient hours for trivial matters that can wait. If you seek privacy, living in a duplex is more difficult than living in a single-family house.
Taking up the role of a Property Manager
Buying a duplex may not be ideal for you if you don’t like finding and managing tenants, collecting rent, setting up escrow accounts for security deposits, and maintaining a rental property. Although it is simpler to operate a duplex than an apartment complex, rental property management is still required. Because there is just one apartment with rental revenue, hiring a property management business makes little sense because the costs might outweigh the rental income.
Rental income that is sporadic
If your duplex relies on rental revenue and your tenant leaves, you’ll need to have some cash or reserves to meet expenditures until you can find a new renter. Vacancies are to be anticipated in any rental property, so be prepared, or you may find yourself in financial trouble and risk losing your house. Although careful preparation might help to alleviate this problem, it is still necessary to be aware.
Maintenance & Repairs
Two units might result in twice the amount of upkeep and repairs for both your house and your tenants. You’ll need to execute move-in/move-out maintenance between renters going out and new ones coming in. Even with excellent renters, no one will care as much about your home as you do, so be aware that upkeep will be continuous.
You’ll also need to examine the apartment on a regular basis to ensure that it is safe and livable for renters. While a duplex has fewer tasks than a bigger structure and the benefit of being next door, you can anticipate ongoing and preventive maintenance.
Shared Utilities
Many duplexes share a single heating system, water meter, hot water, as well as electricity. In most jurisdictions, landlords are responsible for paying shared utility bills. When renters crank up the heat and leave the windows open or the lights on, which is all too typical, this may be an issue. Landlords may install thermostat governors, but they must adhere to state standards on appropriate temperatures throughout the day and evening hours.
To offset the additional cost of paying for utilities, conduct some market research to see what market rentals for apartments with utilities are in your region. You may also get averages by calling utility providers. Utility providers would most likely not tell you how much their present renters pay, but they may offer you an estimate based on the previous year’s prices.
Duplexes that aren’t legal
Unfortunately, Duplexes that aren’t legal are more common than you’d think. Before buying a duplex, find out if it once was converted from a single or another type of property into a duplex. If it was, you’ll need to make sure the duplex is legal, meaning the conversion was approved by the city, is up to municipal building code, and the appropriate permits for the work were obtained.
Don’t assume because it appraised and passed a general home inspection that it’s legal. Penalties for Duplexes that aren’t legal can include fines and having to hire contractors to return the building to its original state—including removing added kitchens, baths, and walls. It’s better to know this before inheriting someone else’s mistakes.
Liability of the Landlord
It’s critical to understand your state’s rules about renting one of your owner-occupied duplex properties to prevent possible responsibility. Despite the fact that the federal Fair Housing Act does not apply to owner-occupied residences with one to four units, state and municipal fair housing laws may apply. Building regulations must be followed in general, and landlords must offer habitable and safe homes.
What to Look for When Buying a Duplex
Purchasing an owner-occupied duplex is similar to purchasing a single-family house, with the exception that you may use the unoccupied unit’s rental income to qualify for a loan. If you’re a first-time homebuyer, the first step is to study lenders, interest rates, and terms, as well as get a prequalification. You’ll be more competitive with a seller, and you’ll be able to close sooner than if you found the house first.
During prequalification, you may browse for houses straight immediately. Make income and cost estimates, as well as an assessment of your personal finances, to evaluate what makes the most sense for you. You may be able to afford a home that is more costly than you anticipated, particularly with the additional rental income, but don’t use that as your criterion. Expenses are typically greater, and you want to balance your housing expenditures as much as possible with the collected rent.
Among the other steps in the home-buying process are:
- Look for a real estate agent and homes to look at.
- Getting a deal accepted
- Signing a purchase & sales agreement (P&S)
- Having a house inspection is a good idea.
- Providing the lender with the necessary paperwork
- Ascertaining that you have enough money for a down payment and closing fees
- Choosing a closing date, attending the closing, and taking ownership of your new home are all steps in the process.
This is an oversimplification of the process of purchasing your first rental property. Closings may take anywhere from four to two months, depending on the kind of financing used and if there are any problems with the property, buyer, or seller prior to closing. Purchasing a home is not difficult, but choosing the correct financing for a duplex may help you save money on interest and fees.
Obtaining a Loan for a Duplex
One of the biggest advantages of purchasing a duplex with the intention of living in one unit and renting the other is that you may take advantage of financing perks. Smaller interest rates, a lower down payment, a longer-term, and the ability to take advantage of programs solely accessible to homeowners, such as Federal Housing Administration (FHA) financing, are just a few of the advantages.
Owner-occupied Financing for Duplexes
For owner-occupied duplexes, FHA financing is preferred. Veterans and, in certain situations, their wives are not eligible for funding from the US Department of Veterans Affairs (VA). Borrowers may use the HomeStyle Renovation Loan to purchase and renovate a home, and conventional financing for a primary residence offers lower rates than investment property financing.
Duplex Tax Benefits
If you live in one unit of your duplex and rent the other, the IRS considers it as two separate properties. You get the benefits of homeowner tax deductions and rental property tax deductions. The IRS also lets you write off half the expenses that benefit both units like Utilities that are shared and trash collection. In addition, you can write off all the expenses you incur to manage the rented unit like marketing and tenant screening.
You may also take advantage of rental property depreciation, which allows you to exempt up to $500,000 of the gain from capital gains tax and avoid paying the rental property depreciation recapture when you sell the duplex. Because the IRS considers your duplex to be two separate properties, only half of the revenues are taxed.
Municipal property taxes should also be considered. If you acquire an existing duplex, your taxes will be based on the current assessed value and the tax rate in your municipality. The same assessment method will be utilized in a property converted to a legal duplex, although the assessed value may alter if a duplex is regarded as more valuable than a single-family house. The local assessor’s office can provide you with information on assessments and property taxes.
Liability Insurance for Homeowners
You may be wondering what kind of homeowners insurance you need if you’re purchasing an owner-occupied duplex. A normal homeowner’s coverage may be sufficient, depending on the insurance company. If your carrier wants you to get rental property insurance, be sure to obtain personal property insurance as well since rental property insurance will not cover your personal goods. You have the option of requiring tenants to acquire renters insurance to protect their personal items in the event of a loss.
The following are some of the advantages of homeowner’s insurance that are not covered by rental property insurance:
- Coverage for the property’s detached structures
- Your personal belongings
- If you’re sued, you’re personally liable.
- If someone is hurt on your property, you’ll have to pay for their medical bills.
These are not included in a typical rental property policy, but if you purchase rental property insurance, you may be able to add detached structures, personal liability, and medical costs for a fee.
Buying a Duplex vs. Buying a Single-Family Home
We’ve shown you what to look for when buying a duplex, and the top mistakes to avoid, and perhaps you’ve decided that buying a duplex is not right for you, or there are no duplexes available where you want to buy. If this is the case, there are other options to consider.
Purchasing a Three-Unit Building
Despite the fact that there are two sets of renters and three apartments to maintain instead of two, the advantages of purchasing an owner-occupied three-unit property may exceed the additional burden. A three-unit building generates higher rental revenue while being no more difficult to operate than a two-unit one. If one of the units becomes unoccupied, the revenue from the third apartment may assist cover expenditures until a new renter is found.
Rooms for Rent in a House
Rather than purchasing a duplex, try renting out separate rooms in your house and bringing in boarders. A border is a renter who leases a single room in a home and shares the kitchen and bathroom (if the room does not have its own). Other portions of the house, such as dens, living rooms, and dining rooms, may also be shared.
Because the tenant will be sharing your home with you, make sure you employ tenant background screening services to qualify your renter unless you know and trust them well. Even if you rent to friends or relatives, you should have a formal rental agreement to prevent any misunderstandings regarding your living situation. When renting rooms in your house, keep your comfort in mind.
Purchasing a House with a Mother-in-Law Suite
Don’t be concerned. In-law apartments do not contain in-laws, but the property may be leased to whomever you like, even your great-in-laws. In-law suites feature their own kitchen, bedroom, and bathroom, as well as additional spaces such as a living room or several bedrooms and bathrooms. In-law flats usually have their own entrance, however, they may have access to the main home from the inside.
In-law apartments can be in a basement, above a garage, a home addition, or a small cottage either detached or connected to the main house. In-law suites differ from duplexes in that the utilities are often shared with the main house, although duplexes can have Utilities that are shared. If you’re going to rent to someone other than your mother-in-law or another family member, check that the unit has an occupancy certificate and find out what the requirements are.
Purchasing a Mixed-Use Building
Mixed-use properties are buildings that have multiple uses, such as retail or office space and apartments under the same roof, or a house with a separate freestanding building that has some commercial use. Purchasing a Mixed-Use Building where an owner can live in one space and rent other commercial-use spaces might be a good option if the buyer doesn’t want to deal with residential tenants. There are several financing options available for mixed-use properties.
Tenants who live in one area and rent the rest of the building for office space are less likely to be present at night and on weekends, and landlord-tenant rules for commercial real estate are less harsh than those for residential real estate. When a mixed-use property has the machinery, equipment, customers, and staff coming and leaving throughout the day, noise may be an issue.
Purchasing Turnkey Property
Purchasing Turnkey Property is a good choice for those who want a property that has been fully rehabbed and may already include tenants and property management services. A property manager can act as a buffer between tenants and owner-occupied buyers. Finding a suitable turnkey duplex might be challenging since most turnkey companies only sell properties in specific locations. If a buyer is willing to relocate, a turnkey property is an option.
Conclusion
Purchasing a duplex is an excellent way to get started in real estate investment. Rental income may help you save money on living costs, and many lenders will consider rental income when determining how much of a duplex you can buy. A turnkey duplex may be the way to go if you don’t want to deal with tenants or manage rental property.
Consider Roofstock’s turnkey real estate if you want to acquire a duplex without having to be a landlord. Turnkey homes come with renters and property managers already in place, enabling you to receive passive income without having to maintain the property. You may search listings in up to 40 different markets on Roofstock’s website and invest in the turnkey home that’s suitable for you.
