Buying a duplex is a great way to offset housing expenses by living in one unit and renting the other. It’s also a great option for beginner investors to learn how to manage rental property. Once those skills develop, owner-occupied investors can move, rent their unit for additional income, and build a real estate portfolio.
If you’re looking to fix-and-flip your way into a duplex or finance a growing portfolio, Lima One Capital offers hard money fix-and-flip loans with a 13-month term and no prepayment penalty on short-term loans. They offer fix-and-flip loans for rehabs, cash-out refinances, construction loans, and multifamily purchases
What Is a Duplex?
A duplex is a residential multifamily apartment building containing two separate units. These units can be arranged side-by-side, one on top of the other, or any other attached configuration excluding homes with in-law apartments, or land with two detached buildings. Duplexes can be nearly any size with any numbers of rooms. The layouts can be identical, mirrored, or entirely different. One unit can have fewer rooms, baths, or bedrooms than the other.
The key is that they have distinct and separate entrances. An in-law apartment is an additional attached living space within a single-family home with its own kitchen, bath and bedroom. In-law apartments typically share utilities. A duplex can have one electric meter and heating unit or be separately metered. Duplexes classified as legal duplexes are considered as separate and distinct residences under one roof.
If both units in a duplex share heating and electricity, owners are typically responsible to pay for these and any other shared utilities. Owners can recoup the expense by charging enough rent to defray these costs. They’d want to make sure their rents are competitive, they don’t over or under charge, and they abide by any state-mandated rent control, where applicable.
Reasons to Buy a Duplex
Buying a duplex is a great way to offset housing expenses by collecting rent from one of the units and living in the other. It’s also a great option for beginning real estate investors since it is easier to manage than buying a triplex or fourplex.
A duplex also has advantages over a single-family home as a first investment property. If the unit is vacant in a single-family house, there is zero income. With a duplex, there potentially is always at least one unit rented and drawing income while trying to secure a tenant for the vacancy.
Offset Housing Expenses
The main reason first-time homebuyers consider buying a duplex is to take advantage of rental income to offset their housing expenses—by living in one unit and renting the other. It can be a great strategy. However, buyers must consider vacancies. If their income can’t cover expenses, and they are dependent on full rental income, it may not be the best option since vacancies are a reality.
Buying in a high-demand rental area and researching local vacancy rates can help keep vacancies to a minimum. Saving three to six months of housing expenses can also create a hedge against a vacancy. High-demand rental areas also command higher rents, but home prices could potentially also be higher. It’s advised that you calculate the net operating income before buying.
Launch a Real Estate Investing Portfolio
Future real estate investors might want to look into buying a duplex before considering larger multifamily buildings and apartment complexes. Owner-occupied duplexes give would-be investors the opportunity to learn how to manage and maintain a rental property with fewer headaches from trying to juggle multiple tenants, leases, advertising vacancies, and managing rental property finances.
After gaining landlord experience, novice investors can move out of the property and rent their unit or do a cash-out refinance and buy a separate investment property. There are many options, and lenders look favorably on experienced investors when offering to finance a new rental property purchase.
Gain Invaluable Property Management Experience
It’s easier to manage an owner-occupied duplex since the owner doesn’t have to travel to a separate location to manage their property and may be more aware of deferred maintenance. Tenants in an owner-occupied duplex may be more mindful about paying rent on time and keeping excess noise to a minimum.
Some property management experience buyers gain includes:
- Marketing vacancies on sites like Zillow Rental Manager
- Screening applicants to find the best renters
- Developing rental property maintenance skills with fewer units to tend to
- Understanding landlord-tenant laws
- Writing and executing leases and other legal documents
- Managing rental property finances
- Gaining insight to landlord duties and responsibilities
Favorable Mortgage Terms
Owner-occupied duplex financing carries the same benefits as buying a single-family residence. Owner-occupied buyers benefit from lower down payments, low interest rates, and longer 30-year terms. Many mortgages also use rental income to qualify, allowing buyers to qualify for more expensive properties. Homeowner interest rates are typically lower than investment property rates, currently around 3.8% and 7.5%, respectively.
There are many government-backed loan programs available to owner-occupied buyers that are not accessible to investors buying properties that are separate from their primary residence. Down payments for these types of loans can be as little as 3.5% whereas investment property loans require a minimum of 20% down and are typically financed for 15- to 20-years in many cases.
Rent as an Airbnb
If your duplex is in a desirable location for business or vacation travel, you could consider renting the other unit as a short-term rental like an Airbnb. If you’re in a college town, reunions, alumni events, graduations, and visiting faculty are all opportunities to offer short-term rental space. This also allows you to block out times you may not want renters in your property.
Rental income from short-term rentals can add up fast, but maintenance can also. Rental income is less stable than leasing to long-term tenants since you can’t guarantee you’ll always have short-term renters. If you like the idea of offering your vacant duplex unit as a short-term rental, make sure it makes financial sense.
Reasons Not to Buy a Duplex
There are numerous reasons that make buying a duplex a wise investment. However, there are circumstances when buying a duplex is not the best choice. Duplexes put owners in proximity with their tenants, require developing property management skills, and aren’t a guarantee for consistent rental income.
Tenants in Proximity
Living in proximity to tenants is not for everyone. Property damage, noise, and late rent may occur less often when a tenant sees their landlord every day. However, they also may know when you are home, knock on your door, and call frequently and at inconvenient times for minor things that can wait. If you’re someone who prefers privacy, it’s harder living in a duplex than if you lived in a single-family home.
Being a Property Manager
If you don’t like acquiring and managing tenants, collecting rent, setting up escrow accounts for security deposits, and maintaining a rental property, buying a duplex might not be right for you. Although it is easier to manage a duplex than an apartment building, it still requires rental property management. Since there is only one unit drawing rental income, it doesn’t make sense to hire a property management company as the fees could potentially exceed the rental income.
Sporadic Rental Income
If you’re relying on rental income from your duplex and your tenant moves out, you have to have some sort of savings or reserves to cover expenses until you can secure a new tenant. Vacancies are expected for any rental property, so you must be prepared, or you could land in financial hot water and potentially risk losing your home. Careful preplanning can mitigate this issue, but it is still important to be aware.
Maintenance & Repairs
Two units can mean double maintenance and repairs to your home and your renters. Between tenants moving out and new ones moving in, you’ll need to perform move-in/move-out maintenance. Even with great tenants, no one will care about your property as much as you do, so it’s important to understand maintenance will be ongoing.
You’ll also need to inspect the unit periodically, making sure it is in safe and habitable condition for tenants. While a duplex is less task heavy than a larger building, and you have the advantage of being right next door, expect routine and preventative maintenance.
Many duplexes share one heating unit, water meter, hot water, and may share electricity. In most states, if units share utilities, landlords are required to pay the bill. This can be problematic when tenants turn the heat up and leave the windows open or leave lights on, which is all too common. Landlords can put a governor on thermostats but must make sure they’re following state regulations on reasonable temperatures for day and evening hours.
To counter the added expense of paying for utilities, you should do market research on what the market rents are in your area for units with utilities included. You can also call utility companies for averages. Utility companies likely won’t tell you what the current tenants pay but can give you an estimate of costs based on the last year.
Unfortunately, illegal duplexes 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 illegal duplexes 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.
Potential Landlord Liability
To avoid potential liability, it’s important to know the laws of your state regarding renting one of your units in your owner-occupied duplex. Though the federal Fair Housing Act doesn’t apply to owner-occupied dwellings of one to four units, there may be state and local fair housing laws by which owners are bound. Building codes generally must be adhered to, and landlords need to provide livable and safe housing.
How to Buy a Duplex
Buying an owner-occupied duplex isn’t very different from buying a single-family home, except you get to count the rental income from the vacant unit to qualify for the loan. If you’re new to the homebuying process, the first step is to research lenders, interest rates, and terms, and get a prequalification. It will make you more competitive to a seller, and you’ll close sooner than if you find the home first.
You can look at properties right away during prequalification. Run calculations on the income and expenses and review your personal finances to see what makes the most sense for you. You may qualify for a more expensive house than you expected, especially with the added rental income, but don’t rely on that as your gauge. Expenses are often higher, and you want to offset your housing costs by the collected rent as much as possible.
Other actions in the homebuying process include:
- Finding a real estate agent and look at properties
- Getting an accepted offer
- Signing a purchase & sales agreement (P&S)
- Having a home inspection
- Supplying required documentation to the lender
- Making sure you have your down payment and closing costs
- Setting a closing date, attending the closing, and taking possession of your new home
This is an overly simplified version of buying your first rental property. Closings can take four weeks to two months or more depending on the type of financing and whether there are any issues with the property, buyer, or seller before closing. Buying a house is not very complicated, but finding the right financing for a duplex can save money in interest payments and fees.
Financing a Duplex
A major benefit of buying a duplex, with the goal of living in one unit and renting the other, is that you can get the mortgage benefits. These benefits include lower interest rates, lower down payment, longer term, and can take advantage of programs only available to homebuyers, like Federal Housing Administration (FHA) financing.
Owner-occupied Duplex Financing
Duplex Loan Limits
Federal Housing Administration (FHA)
Starting at 3.5%
$403,125; high cost areas up to $930,300
Veterans Affairs (VA)
No money down, no PMI
Up to $930,300 in high cost areas
HomeStyle Renovation Loan
95% loan-to-value (LTV)
FHA financing is considered the best for owner-occupied duplexes. United States Department of Veterans Affairs (VA) financing is restricted to veterans and, in some cases, their spouses. The HomeStyle Renovation Loan allows borrowers to buy and rehabilitate a property, and conventional financing for an owner-occupied property has lower rates than investment property financing.
Tax Benefits of Buying a Duplex
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 shared utilities 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 can also take advantage of rental property depreciation and, when you decide to sell the duplex, you can exclude up to $500,000 of the gain from capital gains tax and don’t have to pay the rental property depreciation recapture. Since the IRS considers your duplex as two properties, only half of your proceeds from the sale are taxable.
You should also consider municipal property taxes. If you’re buying an existing duplex, the taxes are going to be based on the current assessed value and the town’s tax rate. If you convert a property to a legal duplex, the same assessment formula will be used, but it can change the assessed value if a duplex is considered more valuable than a single-family home. You can access assessments and property taxes through the local assessor’s office.
Homeowners Liability Insurance
If you’re buying an owner-occupied duplex, you may wonder what type of homeowners insurance you need. Depending on the insurance carrier, a standard homeowner’s policy may cover you just fine. However, if your carrier requires you to get rental property insurance, be sure to get insurance for your personal belongings as rental property insurance won’t cover your possessions. You can require tenants to purchase renters insurance to cover their personal belongings from loss.
Some benefits of homeowner’s insurance not covered by rental property insurance are:
- Coverage for detached buildings on the property
- Your personal property
- Personal liability if you’re sued
- Medical payments if someone is injured on your property
These are not standard in a rental property policy, but if you buy rental property insurance, you may be able to add detached buildings, personal liability, and medical payments to the policy for an additional cost.
Alternatives to Buying a Duplex
We’ve shown you how to buy 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.
Buying a 3-unit Building
While there are two sets of tenants and three units to maintain instead of two, the benefits of buying an owner-occupied three-unit building may outweigh the added workload. A three-unit building provides additional rental income and isn’t significantly more difficult to manage than two units. If one unit goes vacant, there is still income from the third unit to help defray costs until a new tenant is secured.
Renting Rooms in a Home
Instead of buying a duplex you might consider renting out individual rooms in your home by taking in boarders. A boarder is a tenant who rents a single room in a house and shares the kitchen and bath—if the room doesn’t have its own bath. Other rooms in the home also may be shared like dens, living rooms, and dining areas.
The tenant would live in the same house with you, so make sure you use tenant background screening services to qualify your renter unless it is someone you know well and fully trust. Even if you rent to friends or family, you should have a signed rental agreement to avoid any confusion about the living arrangement. Consider your comfort level when renting rooms in your home.
Buying a Home With an In-law Suite
Don’t worry. In-law suites don’t come with in-laws included, but the unit can be rented to whomever you please, including great in-laws. In-law suites have their own kitchen, bedroom, bath and may have other rooms like a living area or multiple bedrooms and baths. In-law units typically have a separate entrance but may have interior access to the main house.
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 shared utilities. 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.
Buying a Mixed-use Property
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. Buying a mixed-use property 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.
Living in one space and renting the rest of the building for office space often means the tenants will not be around evenings and weekends, and landlord-tenant laws for commercial real estate tend to be less punitive than residential laws. Noise can be a consideration with a mixed-use property if the business has machinery, equipment, customers, and employees coming and going during the day.
Buying Turnkey Real Estate
Buying turnkey real estate 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.
Buying a duplex is a fantastic way to start investing in real estate. Rental income can offset living expenses, you can potentially get FHA financing, and many lenders will use rental income when calculating how much of a duplex you can afford. If you don’t want to manage rental property or deal with tenants, a turnkey duplex may be the way to go.
If you want to buy a duplex and not have to be a landlord, consider looking into turnkey real estate with Roofstock. Turnkey properties come with existing tenants and property managers, allowing you to earn passive income without having to manage the property yourself. On Roofstock’s website, you can browse listings in up to 40 different markets and invest in the turnkey property that’s right for you.