We Invested in a Duplex. Here’s What We’ve Learned So Far
If you buy a duplex and live in one side, you have a home and rent coming in from the other side to help pay it.
Investment real estate also offers tax advantages. And what could be easier than managing a rental next door?
You’ve probably heard the arguments for buying a duplex instead of a single-family home. But is it really a good idea for you?
Recently, after four years of Florida’s heat and humidity, my wife and I moved back to Colorado to buy a duplex in the small town of Florence.
We’ve only lived here for a short while, so I can’t offer a comprehensive guide to buying a duplex as a home. But a lot can happen in a couple months, so maybe you can learn a few lessons from our experience.
Maybe even enough to decide if you’re ready for this lifestyle/investment…
Buying at a Distance
My wife was busy, so I flew out to Colorado alone for four days to look for our new home and investment.
Once I was back in Florida, we tried to buy a multiunit property — my favorite of the seven properties I’d seen. We discovered a few problems and the deal fell through, so we made an offer on a duplex I’d been in for just 10 minutes.
Buying a property you’ve only been in for a few minutes isn’t as risky as it sounds, as long as you have an inspection contingency in your contract.
If the inspector had found any major problems, we could’ve backed out. Both units were occupied, as well, so we also could have backed out after reviewing the leases, if the rent was less than stated in the listing information.
Real estate is selling quickly in Colorado, and prices are rising, but we didn’t have to buy something. So we offered $119,000, about $8,000 less than the asking price.
The seller said yes.
Meanwhile, my wife was asking me questions I couldn’t answer, like whether the bedrooms were carpeted, what color the walls were, and where the washer and dryer were located.
Fortunately, the inspector answered some of those questions.
More importantly, he happened to have structural engineering experience. The duplex was built in 1900, but he assured us the cracks in the walls (most of which I didn’t recall) were nothing serious.
- Don’t get too attached to a property.
- Have alternatives in mind.
- Try offering less than the asking price.
- Take your time looking at a property if you’re interested in it.
- Hire an inspector with building or engineering experience.
Negotiating the Deal
The duplex had no major functional problems.
After we got the inspection report, we asked for some minor repairs, and the seller agreed. He also assured us one unit would be empty by the time we moved.
Our contract allowed us to cancel the deal if we didn’t find acceptable insurance. And by acceptable, it meant almost anything — from the price to even what could be covered or excluded (such as earthquakes or floods).
The language of the contract said we could cancel the contract “based on any unsatisfactory provision of the Property Insurance, in Buyer’s sole subjective discretion.” Of course, there’s a deadline, as with all contingencies.
The insurance agent asked us questions, which we passed on to our real estate agent, who passed them on to the selling agent, who passed them on to the seller, who answered his agent, who then contacted our agent, who then contacted us, and we contacted our insurance agent, who then had another question.
The process was tedious and slow. And insurance was expensive, which we discovered the day after our insurance contingency deadline.
Fortunately, after questioning our insurance agent, we found we could substantially lower the cost by raising the deductible, paying a year in advance and getting our car insurance through the same company.
The listing information said the units were rented for $650 per month, but I suddenly recalled the tenant on one side telling me she paid $600.
We got copies of the leases emailed to us, and the rent was $650, but was discounted $50 if she kept the place looking good for showings while it was for sale.
- Inspections are an opportunity to renegotiate or back out of a deal.
- Watch deadlines in the contract.
- Ask your insurance agent how you can lower your annual premium.
- Ask tenants questions when you see a place.
- Always ask for rental agreement copies and other contracts
Closing the Deal
As soon as we were past our contract deadlines, we listed our home in Florida for sale.
It sold the next day for more than the asking price — crazy times are back in Florida! We closed the sale 16 days later, a few days after closing on the duplex.
Meanwhile, we discovered the tenant in the unit we planned to occupy was still there.
We pondered the possibility of being homeless after closing in Florida, and decided we needed more information. Emails and phone calls went through the typical maze of real estate agents and we couldn’t get a clear picture of the situation.
My wife found the solution.
She located the seller’s personal phone number on a lease, and we called him directly. The tenant in “our” unit was more or less moved out and would vacate four days before we arrived.
Real estate agents don’t like being bypassed, and some sellers would rather not talk to the buyers at all, but in this case it was one of our best decisions. The seller was very helpful — he even came over after we settled in to answer any questions we had.
We’d mentioned we could close earlier than planned, but we hadn’t heard from the title company. At some point I called them and they said, “Oh yes, we moved up the closing and the papers will be there in a couple days.”
Thanks for telling us — apparently it wasn’t important for us to know when the closing was! We quickly wired the money so it would be there in time. I have never met a title company I like.
- It can help to talk to the seller directly if possible.
- Follow up on everything — you may not be notified of important changes.
How to Make Money With Your Home
We closed early in the month.
Since rent is paid in advance, we were credited at closing with the rent already collected. If you’re tight on money for closing costs, this can help a lot. Essentially, we were making money before we even moved in.
That was the good news.
Five days after we arrived at our new home (with everything we owned and two cats in our minivan), the tenants in the other side announced they were leaving in a week — and one of their three dogs had torn a hole in the carpet.
Fortunately, the previous owner had collected an extra $500 deposit for pet damages.
It was bad news and good news. I wasn’t thrilled to have to prepare the other side for new tenants while still settling in and painting our side. On the other hand, we’d probably find better tenants and could start fresh with our own rules.
We decided to use a placement service to find a renter.
For 75% of the first month’s rent, they took photos, advertised in several places, took applications, did credit and background checks, and made a recommendation.
So we had that unexpected expense, a couple thousand dollars in repairs, painting and other preparation, and some vacant time shortly after moving in.
But now we have new tenants in place, and for $50 more per month than anticipated. We hope they’ll stay for years.
- Close the purchase early in the month to collect prepaid rent at closing.
- Expect rental-preparation expenses and loss of income from vacancies.
- Be sure to collect a larger or extra deposit if you allow pets.
- Have a management company find tenants if you’re uncertain how to proceed.
Financing a Duplex
We were fortunate enough to be able to pay cash for our duplex, but you can also finance them.
Bankrate.com explains there are some special advantages to financing a duplex when you live in it.
For example, unlike non-occupant investors, you can get a Federal Housing Administration or Veterans Administration loan.
And even though it’s your home, you can sometimes use the income from the other side to help you qualify for the loan.
But be sure the numbers still make sense once you add in those loan payments.
For example, if the units are similar in size, allocate half of each mortgage payment to the investment unit, along with half of the common expenses and all expenses specific to that side.
You should aim to have at least some positive cash flow (on that unit) after all of those costs.
Tax Advantages of Owning a Duplex
You may have to read up on the tax advantages of owning and living in a duplex.
But basically, anything you spend on the rental unit is an expense that reduces the income you report and the taxes you pay. This includes advertising, paint, flowers for the front yard — anything to help you keep the place rented.
Expenses for the entire property are generally split down the middle.
For example, half of the tax and insurance bills are rental expenses. But talk to an accountant if you have a unique property, like if one side is much larger than the other.
You also get other benefits to further lower your tax bill, such as claiming depreciation as an expense. And you can still qualify for the capital gains tax exclusion on half of the property when you sell, since you live in it.
The disadvantages of owning a duplex are about what you’d guess.
Here’s a short list of the potential problems you could face:
- Tenants who don’t pay on time: Be ready to start evictions quickly.
- Pet damage to your property: We may limit the number of pets.
- Potential liability for accidents on the property: Get insurance.
- Expensive surprises like broken furnaces: Ours are 30 years old, fingers crossed.
- Lots of maintenance work: It won’t be all the time, but probably when you least expect it.
For me, the biggest drawback is the stress of constant decisions.
Do I fix the shower myself or pay five times as much for a professional?
Do I allow the renters to have a garden?
Do I ask for rent on time, even if it means the tenant won’t have money for her baby’s medicine? (That one actually came up on a previous rental I owned.)
These problems are not unique to duplexes. They come with any residential rental property.
Special Duplex Advantages
As an investment, rental real estate has clear advantages.
For example, rents usually go up over time, but your mortgage payment remains the same (assuming you got a fixed rate), so your income rises. But some advantages are specific to owner-occupied duplexes.
For example, a duplex provides an opportunity to invest less in your own home. Our duplex has two 1,100-square-foot units and we paid $119,000, while small houses on the same street cost about the same.
We ended up putting $3,000 into fixing the place up. Coupled with $1,000 in closing costs, we spent $123,000 — $61,500 for our home and $61,500 for a rental, much less than we would’ve paid for a single-family home for either purpose.
We don’t like being landlords, especially after weeks of work preparing the place. I don’t even like real estate. But where else can we get our expected 7% return?
And that’s not even the whole story.
If we’d bought a single-family home for ourselves (our backup plan for moving back to Colorado) we would’ve moved farther from the town center to find something cheaper. We still would’ve paid more than $90,000, instead of $61,500.
Now we get to invest the $30,000 we saved.
We paid cash, but the advantage is there if you borrow, too. By investing less in your own living space, you save thousands in interest over the years.
Another advantage of buying a duplex as a home is you live next door to your tenants, so you can keep track of what’s going on with your investment.
Being on-site, you can more easily deal with little problems before they become big ones.
And the rent check is only a few steps away.
Steve Gillman is the author of “101 Weird Ways to Make Money” and creator of EveryWayToMakeMoney.com. He’s been a repo-man, walking stick carver, search engine evaluator, house flipper, tram driver, process server, mock juror and roulette croupier, but of more than 100 ways he has made money, writing is his favorite (so far).