Investing in Duplex Properties
Benefits of Investing in a Duplex
Why buy a duplex? Real Estate is unique in that the benefit of owning a duplex in one area may outweigh the benefits of owning one in another area that is just a few miles away or even just blocks away. Many benefits can be enjoyed by those who make smart duplex investments:
• Dual income. The biggest benefit is that you get the opportunity to purchase two income-producing properties for not much more than the price of one. You can choose to rent out both units or live in one while renting the other.
• Good resale. While many single family homeowners boast that their property includes separate living quarters (if that is a feature), finding a buyer willing to pay for that added feature is remote. When you’re dealing with a legal duplex, it’s hard to ignore the value. The second unit has its own kitchen, bathrooms, bedrooms, a separate entrances, and separate utilities. This added privacy and separation between units creates value that single family properties can't.
Optional financing. When purchasing a duplex property with the intent to occupy one of the units, you should be able to secure financing with as little as 3.5 percent down and pay a good portion of the mortgage from the rental income you receive from your tenant.
Challenges You May Face. As is the case with any real estate investment, there are challenges, caveats, and negatives. Here are a few to keep in mind:
Fewer location options. While some areas have an abundance of duplexes, other neighborhoods offer very few multi-family properties. If you’re looking to buy in a specific area, you may competing against many other buyers because of the limited market. This is only an issue if you’re picky about the location of your investment property.
Living with your tenants. Purchasing a duplex with the plan to occupy one side and leasing out the other, means you’ll be living next to your tenants. This could turn into a real problem if your tenant is noisy, unkempt or a bit of a complainer.
Tax complexity. If you invest in multi-unit properties, hire an accountant. You want to jeopardize your investment returns by overlooking minor tax obligations or benefits.
Legality. Is the property an actual legal duplex? If you’ve been involved with small, multi-unit property investments long enough, you’ll eventually come across a property that is described as a duplex, but is legally considered a single family property.
How to Find a Good Deal. Aside from the obvious methods of reviewing listing sites and looking for yard signs, there are a handful of other strategies.
• Direct mail. Many investors send out hundreds or thousands of letters to property owners and ask if they’re willing to sell. Don't expect more than a handful of the responses with maybe half of those being good opportunities.
• Networking. Surrounding yourself with other landlords, investors, and real estate professionals pays off. Let them know you’re looking for a duplex and tell them to contact you with any opportunities they run across. It may take time, but you’ll eventually hear about a promising opportunity.
• Searching for motivation. Over-grown yards and worn out paint are common signs of an owner who has lost interest in maintaining their property and might be ready to sell. You can then search property records to learn more about the property or have your Realtor do it for you.
Duplex Investment Mistakes to Avoid
Your first multi-unit buy can be stressful and challenging if you aren’t careful. Surround yourself with experienced investors and a reputable real estate attorney. In doing so, you can usually avoid the following mistakes:
Miscalculating rental income. Just because a property is currently renting for $1250 per month doesn’t mean it will rent for the same amount after you own it. It’s possible that the tenants lease rate has been grandfathered in, or that the current tenant is overpaying and it’s only worth $1100 per month. Always verify the rental rates stated by the current owner by reviewing the actual lease agreement.
Underestimating maintenance costs. You should get a reputable inspection and repair estimate for any issues the duplex may have. Underestimating maintenance costs could leave you with unanticipated expenses and less capital once you become the new owner.
Not considering seller motivation. Why the seller is selling? It’s important to get an honest answer to this question – for two reasons. First, maybe they know something about changes in the immediate area and are looking to sell before they experience upcoming issues. Second, by asking, the seller may give you an answer that provides you with an opportunity to recalculate your offer price.