The idea of investing in duplexes has been embraced by investors throughout the industry. Few exit strategies, for that matter, have proven they are more capable of building wealth better and more efficiently than a sound duplex investment strategy. Perhaps even more importantly, investing in duplexes also serves as a great entry point into the field of real estate investing. There may not be an easier way for new investors to build a rental property portfolio then living in one unit of a duplex and renting out the other, which begs the question: Is owning a duplex a good investment? Better yet, What are the pros and cons of owning a duplex? The answers to these questions will help you decide your next move.
Investing in duplexes is quite possibly the single greatest exit strategy for new investors to consider. The ability to live in one unit while renting out the other grants investors several benefits that can’t be found anywhere else. Of the benefits awarded to those investing in duplexes, the following are perhaps the greatest and most coveted amongst real estate entrepreneurs:
Cash Flow: The first (and most obvious) advantage of investing in duplexes has to do with the potential to generate cash flow. Not unlike traditional single-family homes or apartments, duplexes are able to demand a generous amount of cash flow in today’s marketplace.
Easier To Finance: Due, in large part, to their more risk averse nature, lenders are more willing to take a chance on borrowers seeking funding for duplexes. A single vacancy is much less threatening to a duplex owner than someone investing in a single unit. In the event a single unit property sits vacant, 100% of the profit potential is lost. However, duplexes with a single vacancy still have the opportunity to generate cash flow (oftentimes enough to cover the entire mortgage). As a result, lenders feel a lot more comfortable distributing funds to borrowers, and are more inclined to ease lending requirements.
Faster Portfolio Building: Building a portfolio becomes a lot more efficient when each acquisition consists of several units, as opposed to one. In being multiple units over the course of a single transaction, investors can significantly reduce the amount of time they spend finding and acquiring assets. The amount of time saved at the closing table alone make it possible to build a portfolio faster. Without having to execute an individual closing for every property.
Risk Mitigation: Duplex investments have developed a reputation for mitigating risk. For the same reason lenders are more comfortable lending to someone investing in a duplex, the investors themselves should feel comfortable that their exit strategies typically coincide with less risk than traditional single-unit rental properties. Again, multi-unit assets are less likely to hurt investors with a single vacancy.
Tax Shelter: Not unique to duplexes, a number of tax benefits are extended to any and all qualifying rental property owners. Those who own cash flowing rental properties are awarded the opportunity to write off several expenses and offset income tax each year. The amount the owner is able to write off will vary from home to home (and cost to cost), but the fact remains: rental property owners can save a lot of money at tax time if they are familiar with what they can and can’t write off.
Fewer Overhead Expenses: Investors should expect to spend less on maintenance, as duplexes share a number of amenities like roofs, HVAC (heating, ventilation, and air) units and yards. As a result, there’s a good chance investing in duplexes results in more cash flow than their traditional, single-unit counterparts.
Mortgage Help: In the event an investor is intent on living in one unit and renting out the other, it’s entirely possible to pay for the entire mortgage (or at least a great deal of it) with the rent generated from the leased unit.
Not unlike every investment opportunity, investing in duplexes coincides with an inherent degree of risk. As a result, it is safe to assume there are several drawbacks to investing in duplexes, not the least of which include:
More Expensive: Not surprisingly, a duplex is more expensive than a comparable single-family unit. Multi-unit properties, for that matter, are almost always going to be more expensive than their single-family counterparts.
Less Risk Doesn’t Mean No Risk: While duplexes are known to coincide with less risk than single-family rental properties, they are still an investment, which means they come complete with an inherent degree of risk. Do not assume duplexes are without risk; doing so is an exercise in ignorance. Instead, take every precaution necessary to mitigate the risk, high or low as it may be.
Close Proximity To Tenants: For better or for worse, owner occupants will live within an incredibly close proximity to their tenants. Those who prefer a more hands-on approach may not have a problem living next to their tenants, but those who are interested in earning passive income may view the living situation as an obstacle. With no more than a wall separating them from their tenants, investors may find themselves “working” more than they would like.
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Investing in duplexes is not unlike investing in single-unit rental properties. In fact, all of the criteria one would use to assess a single-family unit may be applied to multifamily homes. For a better idea of what needs to be taken into consideration, here’s a list of things investors must account for when buying a duplex and living on one side of their investment:
A Good Neighborhood: A proper duplex investment strategy still relies heavily on the golden rule of real estate: location, location, location. The neighborhood in which the duplex is located will determine everything from the quality of tenants to comparable rents. In fact, there is nothing more important to the success of a duplex than where it’s located. As a result, investors should carefully vet the location of their own duplex and make sure it meets their specific needs, now and in the future.
Acceptable Property Taxes: The success or failure of a duplex investment strategy will depend on the numbers of a deal. How much money is coming in and how much is going out? That said, investors must account for everything, including property taxes. Investors need to know the amount their duplex will require them to pay in property taxes, as the cost will detract from future profits. Instead of simply ignoring them, investors should visit their local tax assessor and determine exactly how much they should expect to spend in property taxes; only then will they be able to tell if a deal is worth pursuing.
A Good School District: Investing in a duplex doesn’t necessarily need to take place in a neighborhood with a good school district, but being located close to a good educational system is unequivocally better than not. If for nothing else, a great school district should increase the demand of a duplex. And what is demand, if not for the single most important indicator for determining rental and vacancy rates?
A Promising Job Market: Understanding how to buy a duplex should start with understanding the location in which the asset is physically situated. Again, the golden rule of real estate is still as important as ever. That said, there are several economic factors within a given location that can also impact a duplex’s performance. In particular, the local job market must be accounted for. A duplex purchased in a healthy job market suggests there will not only be demand, but also that tenants will be able to afford a lease. When the tenant population is supported by a healthy amount of jobs and opportunities, the economy actually serves to increase the potential of rental properties.
Local Amenities: A good location should boast several attractive amenities. Again, demand is perhaps the most important indicator for a respective duplex; anything that attracts tenants to a given area should be seen as an advantage, and can only help duplex investors.
Future Developments: Researching the health of a respective neighborhood can’t be relegated to present tense, but instead needs to be extended to future developments. A sound duplex investment strategy should, therefore, take into account not only what a neighborhood currently looks like, but also what it might look like several years down the road. Investing in duplexes is a long-term commitment, and every precaution needs to be taken into consideration. An up-and-coming neighborhood, for example, could easily award investors with an opportunity to acquire an affordable home in an area that is only going to get better for the foreseeable future.
Listing And Vacancy Ratios: Prospective duplex investors need to research local vacancy rates. At the very least, the number of listings will determine future rental prices. High vacancy rates may force landlords to lower rents to attract tenants, which doesn’t bode well for investors intent on buying a duplex and renting half of it out to a tenant.
Comparable Rents: In addition to exactly how many vacancies a given neighborhood has, duplex investors need to consider the area’s comparable rents. Exactly how much are similar duplexes being rented out for? Better yet, does the average rental asking price justify the purchase price? Investing in duplexes can prove incredibly lucrative if the cash flow is worth the acquisition cost, but investors must be certain of their investment before they even consider purchasing it.
Investing in duplexes needs to coincide with an inherent degree of due diligence. Not only should investors know what to look for in a sound investment, but it’s equally important that they know what not to do. Here’s a list of things investors need to avoid doing when buying a duplex:
Turning A Blind Eye To The Market And Its Demographics: Ignoring the housing market and demographics in a given neighborhood is one of the biggest mistakes a duplex investor can make. The market and demographics will tell investors everything they need to know about an area. Therefore, avoiding this information is the fastest way to ruin a potential deal. Investors can’t invest in an area they know nothing about; it’s just bad business.
Relying On Appreciation: History has taught us that real estate tends to appreciate more often than not. However, it’s bad practice (especially for long-term investors) for duplex investors to assume an asset will appreciate. Since appreciation is never guaranteed, it is foolish to count on it. It’s entirely possible for an asset to depreciate, not unlike the last recession. Instead, investors should view appreciation as an added bonus, and not something that’s guaranteed to happen.
Underestimating Costs And Expenses: It should go without saying, but investors need to avoid underestimating costs and expenses. If anything, investors should overestimate costs, as an attempt to err on the side of caution. Any attempt to cut corners and underestimate costs could ruin profit marketing in the event something goes wrong.
Tapping Into Reserves: It is a good idea for passive income investors to remain as liquid as possible, which means they should avoid tapping into their reserve funds as much as possible; the money should be left for an emergency. Consequently, investors should keep enough cash reserves to cover anything that might go wrong. That way, a setback won’t completely ruin what was once a great investment opportunity.
Doing Everything Alone: Buying a duplex and renting half of it to tenants is entirely possible to do alone, but not typically advised. Those who truly want to build a passive income portfolio should enlist the services of a third-party property management company. That way, the property manager will take care of the day-to-day activities and free up the investor’s time to add more assets to their portfolio.
There are seemingly countless ways for investors to find viable duplexes to add to their own rental portfolios, but there’s no better strategy than to work with a real estate agent. A good real estate agent will cost investors, but their services are an investment. With a good real estate agent, investors can actually save more money than the agent’s services cost. On top of that, their help will save investors time and a lot of headaches. That said, agents aren’t the only source of duplex deals. A number of websites are dedicated to helping investors find duplexes, not the least of which include:
Zillow, otherwise known as Zillow Group, Inc., is a nationally recognized real estate database. More importantly, Zillow may be used to filter home searches in a given area. Using Zillow, investors looking for duplexes may scour entire neighborhoods and cities for multifamily homes that meet their criteria.
Not unlike Zillow, Trulia allows its users to conduct hyper-localized searches for duplexes and multifamily properties. As one of Zillow’s many competitors, Trulia has also developed a reputation for serving as one of America’s easiest ways to search for real estate. Users simply need to input their criteria (price, location, type of property, etc.) to gain access to the homes available for sale in a given area.
Not to be confused with Zillow and Trulia, Craigslist is not relegated to a real estate database. In fact, Craigslist is an American classified advertisements website run by its users. Anyone with a property, for example, may post a listing on Craigslist, which makes it a great alternative to real estate-specific sites. While not all of Craigslist is dedicated to searching for duplexes, its users will find a lot of properties for sale.
In addition to using websites and real estate agents to look for duplexes, investors should really consider using a direct mail marketing strategy. In its simplest form, a direct mail campaign is a marketing effort that employs promotionally printed pieces of mail (including postcards, newsletters, sales letters, and other marketing material) to target a particular audience. The mail is then sent to specific homeowners who may be more inclined to part ways with their properties.
Almost every method of procuring a duplex will require investors to put at least some money down. Not unlike buying traditional homes, banks or homeowners will want some money up front. However, there are a few exceptions to the rule. Most notably, loans guaranteed by the Department of Veterans Affairs (VA Loans) will not require qualifying borrowers to put any money down at the time of purchase. It is worth noting, however, that qualifying VA Loan recipients must use the loan to purchase a home as their primary residence. Therefore, any attempt to buy a duplex with a VA Loan will require the borrower to live in the property.
Investing in duplexes is recognized by many as the best way for new investors to break into the real estate industry. If for nothing else, the benefits of duplex investing greatly outweigh the negatives, particularly the potential cash flow relative to the amount of risk an investor may take on in a promising deal. That said, every investment coincides with an inherent degree of risk. To successfully execute a duplex investment strategy investors need to mind due diligence and find the right properties that meet their specific needs.