Investing in a duplex can be a good idea if you can pony up the cost and don’t mind being a hands-on landlord. A key advantage is the ability to live in one of the units or rent both out.
If the purchase will be strictly a rental, duplexes offer the capacity to double your cash flow for less than the cost of two single-family homes. You also have the freedom to make half your home.
Buying a duplex for investment is a popular investment strategy used for breaking into real estate, and they’re in demand in every major city.
Table of Contents
Key Points
• Investing in a duplex can be financially beneficial, offering the option to live in one unit while renting the other.
• Duplexes may cost more upfront but can generate significant rental income.
• Financing options for owner-occupied duplexes include FHA and VA loans, which have low or no down payment requirements.
• Tax advantages for duplex owners include deductions for mortgage interest, property taxes, and maintenance costs for rented units.
• Living next to tenants allows for easier property management but may reduce privacy.
What Is a Duplex?
A duplex consists of two living units on top of each other or side by side, along with the land.
Each unit has its own entrance and exit, kitchen, bedrooms, and bathrooms. The two units are conjoined by a wall or a floor/ceiling.
Regardless of their layout, the units share the same plot and deed, and are sold as a single property. Unlike a twin home, a duplex has one owner.
A duplex is technically a multifamily property but qualifies — as does any building with up to four units — for the same kind of favorable financing that a single-family home does if you make the property your address.
The units may share the same utilities but otherwise operate as separate residences. This allows you to avoid doubling expenses over time when you need to replace a water heater, for instance.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Advantages of Investing in Duplexes
The advantage of buying a duplex, with the freedom to live in half and rent out the other (or not), speaks for itself.
There are other pros. Here are the major ones.
Cash Flow
Whether you’re trying to build or buy a duplex, a key advantage is the cash flow potential by renting out both units.
Alternatively, you can live in one of the units, which will ultimately reduce the risk if the other half sits vacant for an extended period.
The rent from the other unit may cover part or all of your mortgage costs, depending on how much you put down on the property.
Financing If Owner-Occupied
Eligible duplex owner-occupants have financing choices:
• VA loans
• Conventional mortgages
Each of those calls for a low down payment or none at all.
The government-insured loans can be used for properties with up to four units as long as the buyer plans to live in one of the units. FHA loans are favored by first-time homebuyers — those who have not owned a principal residence in the past three years — and buyers with lower credit scores.
For an FHA or VA multifamily loan, the owner is to live onsite for at least a year.
Investors who plan to rent out both units must use conventional mortgage loans. They should expect to put down at least 20%. The mortgage rate will likely run a bit higher than for a loan for an owner-occupied property.
A duplex buyer can use both current passive income and projected rental income to qualify for an FHA loan and conventional mortgage loan but not a VA-backed loan.
Faster Portfolio Building
Unlike starting with a detached single-family home and working your way up, buying a duplex lets you double the number of rentable units you own upfront for less than the cost of two single-family rental homes in most markets.
This cuts down on the amount of time you need to find suitable properties to purchase and the closing costs you need to pay.
Buying a duplex also will give you a chance to enhance your real estate portfolio diversification.
Tax Breaks
Owner-occupants can deduct mortgage interest and property tax on their half.
If they have a renter, they can write off expenses for that half: repairs, insurance, any utility bills, advertising, management fees, and so on. And they can depreciate the rented half of the property.
Risk Mitigation
If you’re living in one of the units, you’re still getting some use out of the property if the other remains vacant. You can even bide your time if you need to make home improvements to the other unit.
Comparatively, if you own a single-family property that sits vacant, that’s cash every month out of your pocket that it remains empty.
Additionally, lenders view the risk to be more diffused for duplexes, particularly if the owner’s living in one unit. From their perspective, it’s much less likely that borrowers would default on a duplex that serves as their primary residence than the owner of a comparable investment property.
Lower Overhead Cost
The same furnace, AC unit, and hot water heater may serve both units in a duplex. If that’s the case, you may only need to worry about maintaining a single set of utilities for both dwellings.
Disadvantages of Investing in Duplexes
Like all rental properties, the primary disadvantage of duplex is the risk that it remains vacant for an extended period of time, although the risk is mitigated if you’re living in the other unit.
Here are other possible downsides when investing in a duplex.
Possibly Cost Intensive
While it may be more efficient than buying two detached single-family homes, a duplex still might cost more than if you had bought a single stand-alone property.
You’ll have twice the number of kitchens and bathrooms to contend with, which will increase costs if you intend to renovate both units.
The cost of building a duplex may exceed the cost of building a house.
Finally, property insurance for a duplex is usually higher than for a single-family home.
Risk of Vacancies
If one or both of the units in your duplex remain vacant, the opportunity cost and negative impact on your bottom line as property manager could be enormous.
If the average person is spending a lot on rent, that’s either a great sum to put in your pocket or a terrible one to lose.
Make sure you properly research your target market. Just because you stumble on a duplex that looks great doesn’t necessarily mean it’ll rent from day one.
Proximity to Tenants
If you intend to live in one unit and rent the other out, the coziness with your tenants is a double-edged sword. On the other hand, you’ll be able to monitor the coming and goings of your neighbor, but on the other, you’ll be right next door if any issues arise.
Where to Find Duplexes and How to Buy One
If a stream of rental income and capital appreciation sound good, it’s smart to start scoping out what’s on the market.
You also can seek prequalification and preapproval for financing.
Don’t expect an easy hunt, as serviceable duplexes in great locations are in demand. When you find one, expect competition, true of any good investment property.
Like all real estate investments, asking prices for prime duplexes have spiked over the past few years due to low supply and record demand.
Start by browsing online listings for duplex owners and filtering for properties with two units. It’s also a good idea to find a reputable real estate agent and specifically request to view duplex properties.
Time is of the essence when making offers. A preapproval letter can carry a lot of weight.
Explore SoFi’s Home Financing Options
Buying a duplex can be a smart move: You’re getting two potential rental streams under one roof typically for less than two single-family homes. Financing is especially attractive if you plan to live onsite.
If you’re shopping for a duplex, keep SoFi in mind. SoFi offers home mortgage loans for owner-occupied primary residences, second homes, and investment properties.
FAQ
What should I look for when investing in a duplex?
Make sure it’s legally zoned as a duplex. Know the neighborhood. See if the numbers would make sense by researching comparable rents and factoring in any repairs. Gauge noise transfer and privacy if you plan to live there and rent the other unit out.
How do I buy a duplex?
Know whether you plan to live at the property, which will affect your financing. Getting preapproved for a mortgage is a good idea. Look at prices in your area, scour online listings, and consider hiring a good buyer’s agent. In most markets, expect competition.
Is it profitable to own a duplex?
Because a duplex usually does not come with HOA fees and consists of two rentable units, it can be profitable. A duplex also might be more appealing to renters than apartments are. And maintaining a duplex costs less than managing two individual rental units.
Do duplexes increase in value?
They often do, but appreciation tends to be lower for duplexes than stand-alone single-family homes.
Photo credit: iStock/aluxum
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