Investing in a Duplex?
Jennifer Martin September 28, 2023
Jennifer Martin September 28, 2023
"Real estate investing has as many forms and looks as people do! You can range from buying a single family rental property to buying a duplex or other multifamily property.
New investors might be nervous about starting with a multifamily unit, while others just don’t know enough about it. I'll guide you through the process of buying a duplex to achieve your investing goals.
A duplex is a housing unit with a single shared wall that can accommodate two families. The floor plans of these units typically mirror one another but can vary, and each unit has its own kitchen and bathroom. A duplex can be one bedroom, two bedrooms, three bedrooms, or four bedrooms. These units don’t have a shared entrance, so they are completely separate from each other.
A duplex may or may not have washer and dryer hookups, but each unit has its own separate entrance. Tenants may share a yard space or it might be separated by a wall or fence. Some landlords rent out one side of a duplex and live in the other to save money on rent. This can be a good option for a new investor or someone looking to lower their monthly expenses.
If you decide to live on one side of the duplex, you can write off the mortgage interest for that side of the unit. However, there are also tax benefits you can take advantage of by renting the other side. Talk to your tax adviser about writing off a portion of your property taxes, costs for repairs and maintenance, or mortgage insurance to reap the benefits of both renting and owning a home.
If you don’t live in the duplex, you’ll be able to collect two rents as long as both units are occupied. Even if one tenant moves out, you should still have income from one of the units. Obviously, your deal will be unique, but often the best duplex deals allow you to pay the mortgage payment with the rent from one unit, leaving the second rent as cash flow. This may not work out exactly for your deal, but the ideal situation will be close.
Regardless of whether you rent one side or both of the duplex, you’ll gain knowledge of being a landlord. As a landlord, you’re responsible for maintenance and repairs, collecting rent, handling discrepancies and complaints, and evictions if necessary. Buying a duplex provides you with two units, but they’re in the same location and share features, making them easy to access and check on.
Duplexes can be more affordable than other real estate investment options, such as buying a single-family home, that offer similar potential. When buying a duplex, make sure you research the neighborhood. Depending on the location, it may or may not be a great deal. It’s also important to use an inspection to understand repair costs so you can budget accordingly.
Here’s a step-by-step guide on buying a duplex to help you through the process:
You are already doing step one, so congrats! It’s important you gain a solid understanding of how buying a duplex works and how to analyze investment properties before getting in too deep. This will help you find the best deals.
I recommend lining up financing first – but you may want to switch around steps two and three. I can refer you to a good mortgage broker. Either way, it’s important to get your financing sorted if you want to buy a duplex or any real estate investment property..
If you are buying a property listed on the multiple listing service (MLS), you’ll want a real estate agent. This is where I come in! Using a real estate agent is the most common way to buy properties – especially for new investors – so don’t wait to find a great real estate agent. Don’t worry, real estate agents are typically free for the buyer. The seller pays the fee when the deal goes through..
Look for an agent with the following traits:
It’s important that you tell your real estate agent exactly what you are looking for. If you want a duplex, let them know. Any good agent will hook you up with automatic MLS emails informing you of all the new deals, as long as you establish set criteria that fit your needs.
The criteria should include, at a minimum:
Let your agent know about your criteria and discuss what ideal properties might look like and what your budget is. A good agent will know the local market and can help clarify what is possible – or just fantasy.
Next comes the fun part: hunting for a good deal. There are several methods you can use, which we’ll discuss shortly. But most likely, your real estate agent will supply you with a list of potential properties.
Look for properties yourself, too, in case your agent missed any. Websites like Zillow, Trulia, and Redfin can be great for scanning potential deals. But keep in mind that these sites never contain all the information and may even contain faulty data. Your agent will ultimately have the best information.
Once you find some potential deals, it’s time to get out your pen and paper and start analyzing. We’ll talk more about analyzing deals in a moment, but I’d recommend that you use the BiggerPockets Rental Property Calculator to analyze potential deals.
You might find a duplex deal that appears to be awesome – but after running it through the calculator, find that it’s clearly not.
Once you find a deal that pencils out, it’s time to make the offer. Your agent will do the bulk of the heavy lifting by filling out the (mountains of) paperwork needed. If you aren’t using an agent, you may have to find the correct forms yourself, which you can usually obtain for free from a local title company.
At this point, your offer will either be:
Negotiate with the seller until you either come to an agreement or part ways. Keep in mind, negotiating can force you to get emotionally involved and encourage you to pay more than you should for a property. Stick with your math and don’t pay more than you should.
Once you and the seller agree to all terms, known as “mutual acceptance,” it’s time to do your due diligence. Now is when you inspect the property to make sure it has everything it’s supposed to have. I’d highly recommend hiring a professional home inspector to look at the property and give you a detailed report of what needs to be fixed. This usually costs less than $500.
After the inspection, you can either choose to accept or reject the property – or make the seller pay for all or some of the repairs. It’s all up to negotiation. During this time, you will also finalize the loan documents, which can be annoying, and review any leases on the property.
Next, it’s time to make the property your own. Depending on what state you live in, you will either close at a title company or an attorney’s office. Your agent should walk you through any difficult spots up to this point.
Finally, it’s yours! The fun is just beginning.
Now, it’s time to manage the property or hire a property manager to do it for you so you can start collecting your rental income. This is when BiggerPockets comes in really handy. Everything on the site – from the podcasts and blog to the forums and calculators – is geared toward furthering your success, so take advantage of this incredible social network.
Learn more on BiggerPockets:
There are a lot of different ways to find good deals – some easy and some hard.
In addition to the MLS and other sites like Zillow and Redfin, there are creative methods for finding deals. These are suited for buyers who either need an extra push because deals are too hard to find on the MLS or who want to score an even better deal.
Keep in mind that the following techniques are outside the realm of what a real estate agent will do, simply because there is little chance that they’ll make money this way. Therefore, if you pursue any of these options, understand that you may be slightly alone.
If you order a bad hamburger from McDonald’s, you can throw it away. If you buy a bad stock, you can sell it. If you get a bad dog, you can train it. However, if you buy a bad property, you might be stuck with it for years.
This is why you must learn how to properly analyze a deal. Here are the facts: If you don’t have the right math going into a deal, you’ll never get the right profit coming out of it. You make your money when you buy. A thorough analysis is essential.
First, whether you plan on living in the duplex or not, run the analysis as if you were not. Why? Because chances are, you won’t live there forever, so it must make sense as a rental when you move out.
We’ll look primarily at the cash flow – the extra money left over after rent has been collected and expenses paid. The concept of cash flow is fairly simple – income minus expenses – but calculating it can be difficult. There are numerous easy-to-forget expenses, like:
If you forget to account for any one of these things, you’ll wind up with less money than you planned. That’s not good! So when you look at potential cash flow, take all these expenses into account.
Let’s say I found a duplex that I thought should be a great deal. It has a $60,000 purchase price and $800 monthly rent, the numbers seem to work out – but running it through the Rental Property Calculator indicated the total cash flow would be just $20.88 per month. With the $20,000-plus investment this property requires, that’s a miserable 1.19% return on investment!
Yikes! You could do better with a bank CD.
There are a few good options for financing duplexes. I’d recommend researching each option in a bit more detail to decide if it suits your investing strategy and goals and then making some phone calls.
If you have the cash, then this one should be easy. Make your deal, and if it’s accepted, you can close pretty fast. However, most people don’t have the money to buy property without some sort of financing.
Conventional loans are the same run-of-the-mill loans you get at pretty much any bank or credit union. Typically, you will put down 20%, depending on the bank, and usually – but not always – be offered a fixed rate, which means the interest rate will never change. That interest rate is typically pretty low.
If you can get a conventional loan, you have to have approximately 20% for a down payment. This is a great option because of the stability that comes with a conventional loan.
To find a conventional loan, just talk to a lender, mortgage broker, or credit union. These are the most popular loans on the planet – they’re easy to find. But here’s a word of wisdom: Nearly every bank has the same rules and can do the same loan. But while the bank loans may be identical, the banker is an important piece of the puzzle.
A good banker can close loans that no one else can – because they are smart, creative, and persistent. So, talk with four to six different banks and find an exceptional banker. Even better: Get recommendations from other investors.
The FHA (Federal Housing Administration) is a government agency that exists to help Americans become homeowners through a loan program that allows banks and other lenders to finance extremely low down payment loans to first-time homeowners. An FHA loan requires just a 3.5% down payment, which means on a $100,000 property, you only need to pay $3,500 plus closing costs.
In comparison to the conventional loan, which usually requires 20% down, this can be a lifesaver for homebuyers. Keep in mind that the FHA loan does have a few extra costs that can make your payment a bit higher, like mortgage insurance, so be sure to calculate that when doing your analysis.
In addition, FHA loans are only available for individuals who plan on living in the unit for at least one year, so you have to move into the duplex to use this option. The cool thing is, however, that an FHA loan is good for single-family houses as well as duplexes, triplexes, and fourplexes.
To find an FHA loan, just ask any local bank, credit union, or mortgage professional if they do FHA loans. Most of them do.
The 203(k) loan is one of my favorite products on the market. It’s actually part of the FHA loan program – but with an interesting twist. You can incorporate the repairs you plan to make into the loan. In other words, if your proposed duplex was $100,000 but needed $30,000 worth of work, you can get an FHA loan that requires just 3.5% of the total cost ($130,000) and finance the repairs into the loan.
Like the FHA, the 203(k) loan requires you to live in the property for a year but is applicable for duplexes, triplexes, and fourplexes.
If you are a U.S. military veteran, you can obtain a VA loan that requires $0 down. Yep, nothing, nada, zilch! Like FHA loans, most banking professionals offer these types of loans, so speak to your favorite lender.
Referrals from good professionals are the best way to find other good professionals, so ask around. New loans and new loan products are being produced all the time, so you’ll never know what is out there until you pick up the phone and start calling.
Use these answers to frequently asked questions about buying a duplex to further understand whether this is the right move for you:
The process for purchasing a duplex versus a single family home will be similar if you’re buying them for similar reasons. If you buy a duplex that you plan to live in, you have the benefits that come with owning your own home as well as renting out a home. You can’t get this with a single-family home. You might also qualify for a larger loan because you can rent out at least half the duplex.
The costs of buying a duplex will vary widely based on real estate values in your area, how much money you put down, and what your repair costs and other fees might be. It’s more important to run your numbers. Use the purchase price, fees you have to pay at closing and during the buying process, and estimated rent and repair fees along with all the bills and other costs of being a landlord.
After you run all the numbers, then, and only then, will you know if you’re getting a duplex at a good price. What really matters is the income potential, the cost of the property is just one piece of the puzzle.
Like with single-family homes, there are opportunities out there that allow you to buy a duplex with no money down. You may be able to work with a personal lender or a hard money lender, or you could apply for an FHA loan if you plan to live in the property. Sometimes, borrowers can qualify for 0% down with an FHA loan.
Yes, you can buy and own half a duplex. However, this isn’t advisable. It means you own the property jointly with the other tenant. So if any major repairs need to be made to the home, you’ll have to work with them to pay for the work. It might be harder to sell half a duplex down the road if you decide you don’t want it anymore.
If you find the right deal, a duplex can be a great investment. It offers you the chance to live in one unit while you rent the other out, potentially eliminating your need to pay rent. You can also get two rents for owning a single property.
Of course, if you get the wrong deal, owning a duplex could be a nightmare. It means that you have two places to buy appliances for, make repairs to, and deal with tenants. This can all add to the stress of being a landlord. Consider your options carefully and use the resources available to you on BiggerPockets. We’re here to help you succeed."
Exclusive Credit for this article: Bigger Pockets
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