How to Buy a Duplex

So, you’re a real estate investor and you want to buy a duplex. Duplex owners have a unique opportunity to make double the rental income on only one mortgage payment. Often, real estate investors will buy a duplex and live in one unit. However, for the purposes of this article we will not discuss owner occupied duplexes, only duplex investing where both units are rented out. When done properly, buying a duplex can generate healthy cash flow. However, duplex owners will tell you this is by no means a passive income source, at least at first. Buying a duplex requires significant research, due diligence, and capital. In this post, let’s take a closer look at the process, the pros and cons, and some other key considerations.

What is a Duplex?

A good starting point is defining the term duplex. Put simply, a duplex is a multi-family home with two units that have separate entrances on one plot of land. What is really interesting about buying a duplex is that any multi-family property with two to four units is considered single-family residential. So even though a duplex has two units, it is still considered a single-family residential property. Let’s take a closer look at some of the pros and cons of this investment strategy.

Pros and Cons of Buying a Duplex

Before buying a duplex, it is essential to weigh the pros and cons.

Pros of Duplex Real Estate Investing

Double the Rental Income: Real estate investors can purchase a duplex on one loan with one monthly payment, yet earn rental income on two units.

Tax Benefits: Rental properties have tax advantages including deductions on interest, landlord insurance, marketing expenses, and more.

Management Ease: Manage two rental properties at one location.

Cons of Duplex Real Estate Investing

Double the Risk: There is double the chance of vacancy and lack of help in paying your mortgage. That being said, having one unit occupied and one unit vacant is better than a standalone vacancy.

More Expensive Financing: Often real estate investors will have to pay higher interest rates and have a higher down payment to finance a rental property. We’ll get into more detail later.

Stringent Requirements: A conventional loan or government backed loan through the Federal Housing Administration is extremely difficult to qualify for if you are purchasing a rental property. We’ll get into that more later.

How to Buy a Duplex Walkthrough

If you’ve decided that buying a duplex is a good move for you, here are some key steps to follow. Keep in mind, this is a rough guide, and you should always consult your counsel before moving forward with any real estate investments.

Define Your Goals and Budget

Before buying a duplex, it’s important to define your goals and establish a budget. Run a complete financial analysis to determine your potential rental income, monthly expenses, closing costs, and down payment. Don’t forget about potential maintenance and repairs, and keep in mind that multi-family housing investments require a bigger down payment than an owner occupant property.

Research Your Identified Housing Market

So much of real estate investing comes down to location. Conduct thorough research on the housing market in your desired location. Look for areas with low vacancy rates, strong rental demand, and potential for property appreciation. Consider factors like neighborhood amenities, proximity to schools and public transportation, and future development plans. Real estate websites, local market reports, and working with a knowledgeable real estate agent can provide valuable insights.

Find a Lender

Explore financing options specific to duplex purchases. For this type of rental property, there are three common options: a local bank, an FHA loan program, or an alternative lender. FHA loans tend to be the most economical, yet the hardest to qualify for. A bank mortgage loan will be slightly more expensive than a government agency loan, yet not all banks finance rental properties. Many real estate investors find success with a DSCR loan lender. We qualify each mortgage loan on projected rental income, rather than the borrower’s personal income. This unique type of loan program is an expensive option with a large down payment, yet many experienced real estate investors will use them as long as they have positive cash flow. Especially since the maximum amount of conventional loans investors can obtain, and more than two conventional loans have particularly stringent requirements.

Engage an Investor-Friendly Real Estate Agent

Collaborating with experienced real estate agents who specialize in investment properties is highly beneficial. The process of buying your primary residence is very different, so an experienced agent can help you identify suitable duplexes, negotiate offers, and guide you through the entire multifamily housing buying process. Look for agents with a strong track record, local market knowledge, and expertise in multi-family homes.

Find a Rental Property to Purchase

When selecting a duplex, evaluate key factors such as the property’s condition, cash flow potential, and location. Conduct thorough inspections to identify any potential issues or needed repairs. A professional home inspector could save you in the long run. Review historical rental income and expenses to assess the property’s financial viability. Familiarize yourself with local regulations and zoning laws that may affect property use.

Make an Offer

Once you’ve found the ideal duplex, it’s time to make an offer. Your real estate agent can help you determine an appropriate offer price based on market analysis and property condition. Prepare to negotiate with the seller, considering factors such as repairs, closing costs, down payment and contingencies. Stay flexible but ensure your offer aligns with your financial goals and the rental property will bring in cash flow.

What to Keep in Mind When Managing a Duplex

Now that you’ve added a duplex to your real estate portfolio, it’s time to talk about management duties.

Property Management and Rental Income

Once you’ve closed on the duplex, establish a comprehensive property management plan. Determine whether you will self-manage or hire a property manager and whether you want to find your own tenants or hire a real estate agent. Screen and select reliable tenants, establish lease agreements, and maintain regular communication. Other property management duties include collecting rent and overseeing repairs. Regularly review the rental market to ensure your rental rates remain competitive and maximize your income potential.

Ongoing Maintenance and Monitoring

As a duplex owner, ongoing maintenance and monitoring are essential for the long-term success of your investment. Set aside funds for repairs, upgrades, and routine maintenance. Conduct periodic inspections to address any issues promptly.

Mortgage Insurance and Property Taxes

Landlord insurance is different than standard homeowner’s insurance, so make sure you have the proper coverage for multi-family housing. Also consider fighting your property taxes annually to lower your mortgage payments.

Diligent Records

Document all income and expenses related to your rental property. For expenses, include mortgage payments, repairs, advertising costs, mileage, etc. Also document rental income and security deposits.

Summary

Buying a duplex can provide financial stability and wealth-building opportunities. By following this comprehensive guide, you are well-equipped to navigate the duplex buying process successfully. Remember to define your goals, conduct thorough research, secure appropriate financing, and work with experienced professionals throughout the process. With careful planning and diligent management, your duplex investment can generate consistent rental income and potentially appreciate in value over time. Don’t forget to consult your counsel before purchasing any rental property or real estate investment.