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In a challenging housing market for buyers, making such a significant financial decision can feel like a daunting challenge. One way to take some of the sting out of your investment is by buying a small multi-unit property like a duplex.

Duplexes are a great way to build a small real estate portfolio, allowing you to live in one part of the home and offset the mortgage by renting out the second unit. This makes duplexes especially attractive to first-time homebuyers who worry how much a home purchase will set them back financially. (You can even use a government-backed loan, like an FHA or VA loan, to help purchase a duplex that you plan to live in.) For more experienced homebuyers, duplexes are a great way to scale a portfolio without needing the capital of a corporation.

What is a duplex?

A duplex is a multi-unit residential property that has two separate entrances to each independent unit. Most of the time, the units are next to one another with a shared wall in between, or the units are split by each floor of the building. They are completely self-contained, with their own kitchen, bathroom, and living spaces, but often share outdoor spaces and driveways. Basically, they’re regular houses, just built for two families to live in privately. Duplexes can come in a variety of styles, from traditional single-family homes to modern multi-unit buildings.

Because you're sharing the building with another unit, the cost of owning and maintaining the property can be spread out over two units, which can make it more affordable for you.

Should you buy a duplex and rent out half?

Buying a duplex is a good way to offset some of the financial burden that comes with buying a house and earn some passive income, but there are clear tradeoffs.

Buying a house is a huge decision. Everyone wants to make sure they make the right choice. A duplex might be a smarter investment than a single-family home but it comes with distinct challenges not all first-time homebuyers are ready for.

It’s an easier decision for people current homeowners who have experiencing buying and managing a home of their own already and want to dip their toes into real estate investing.

4 reasons to invest in a duplex:

  • You’re ready to be a landlord: Duplex owners must have the time, patience, and financial flexibility to handle a tenant’s needs.
  • You can handle the costs: Think of renting out your duplex like running a business. You may have to put money in for repairs and upkeep the second unit to make sure it’s worth it. You’ll also have some additional tax paperwork to take care of.
  • You don’t mind having less privacy: You can imagine the potential awkwardness and discomfort of sharing a wall with a tenant you don’t get along with.
  • You can handle surprises: When a tenant moves out of the other unit, you might struggle to fill the vacancy. You'll risk missing income for certain months and if you're dependent the rental income.

Related: Should you sell or rent my house?

What are the advantages of buying a duplex?

Regardless of your homebuying experience, buying a duplex may be a great decision, especially if you're using it as an investment and planning to rent out half. With the potential for passive income, appreciation, tax benefits, and the opportunity to offset your own housing costs, buying a duplex has many benefits.

Extra income or diminished mortgage

The biggest benefit of buying a duplex is that you only live in one unit. You’re paying a single mortgage for the entire property, so you can rent out the other unit to either offset your mortgage payments or generate extra income. Renting out the other unit also can improve your debt-to-income ratio, making it easier to secure loans in the future.

Time also creates more income with duplex rental property. Most landlords increase the rent every year, especially in in-demand housing markets. Your mortgage payment likely won’t increase unless you fall behind or something drastic happens with your financial situation, so the longer you own a duplex, the more you can make each year in future rental income.

They’re affordable and scalable

If you’re looking to invest in real estate, buying a duplex is often less expensive than buying two single-family homes.

Most individuals can’t afford an entire apartment building. But duplexes are often comparable in price to single-family homes, allowing you to scale your portfolio without paying an exorbitant premium. Like any real estate investment, duplexes have the potential to appreciate in value over time. As the property increases in value, you can potentially sell it for a profit or refinance your loan to access the equity you have built up down the road.

You can reap tax benefits

Landlords get to deduct certain expenses in their federal tax returns, on items as diverse as advertising, depreciation, insurance, mortgage interest, property taxes, operating expenses, and repairs. (Of course, you also have to report your rental income.)

They’re easy to rent and manage

For investors, duplexes are popular with renters. They tend to be bigger than apartments and, naturally, there are fewer neighbors than a big apartment building. Plus, they often have semi-private outdoor spaces and off-street parking. The vacancy risk is also lower as tenants rarely vacate at the same time. Property management and maintenance on duplexes are relatively easy since units tend to be fairly small and they’re right next to each other.

What are the drawbacks of buying a duplex?

For first-time homebuyers, the pros of buying a duplex certainly outweigh the cons, but there’s a lot more to consider for investors who don’t plan to live in the property.

  • Landlord life: Being a landlord isn’t for everybody. You have to vet tenants and respond to their needs, make time for repairs and maintenance, and if you live next door to your tenant, you might find them knocking on your door when things don’t get done fast enough for their liking.
  • Extra upkeep: Two units means two sets of problems. Not only do you have to pay for the upkeep of your own home, but you must also do it for the other unit. And if you rent to a tenant who doesn’t respect the space, you may spend more money than you’d like on maintenance.
  • More expensive insurance: Homeowners’ and landlord insurance could also be more expensive than individual homeowners’ insurance. Some municipalities may even charge higher property taxes for multi-family homes.

What kind of loan do you need for a duplex?

How you finance your duplex depends on whether you plan to live in the home or not. Duplex-owners who plan to occupy the home have more options when it comes to what type of mortgage they can qualify for.

In addition to conventional loans, as long as you're using one of the units as your primary residence, you can use an FHA loan or VA loan to buy a duplex home. 

If you're a real estate investor though then you can only take out a conventional loan to finance a duplex. Keep in mind that buying an investment property and multiunit properties come with more with risk, so you'll  face higher mortgage rates or stricter terms on your mortgage than if you were buying a single-family home to live in yourself. 

Whether you're buying a duplex as an investment property or planning to occupy it yourself, the best thing to do is shop around with different mortgage lenders to see what rates and terms they'll extend. There are many programs designed to help people buy their first home. However, they don’t all extend help for people buying multi-family homes.

FHA duplex loan 

It's possible to use an FHA loan for a multi-family property and doing so can be a great option for individuals who don't have the best financials. One of the biggest advantages of an FHA duplex loan is that it allows borrowers to put down as little as 3.5% down. Another advantage of an FHA duplex loan is that it often has lower credit score requirements and more flexible debt-to-income ratio requirements than other types of mortgages. While the exact credit score needed to qualify for an FHA loan can vary depending on the lender, many lenders will approve borrowers with credit scores as low as 580.

One potential downside of an FHA duplex loan is that it does require the borrower to pay mortgage insurance. This insurance protects the lender in case the borrower defaults on their loan, and it is typically required on FHA loans with down payments of less than 20%. This added cost can make the loan more expensive, but it can also provide peace of mind for borrowers who are concerned about their ability to make their monthly mortgage payments.

→ Learn more in depth about FHA loans

VA duplex loan

If you are eligible for a VA loan and are looking to purchase a duplex property, it can be a great way to finance your purchase without having to make a down payment or pay mortgage insurance. One of the benefits of using a VA loan to purchase a duplex is that there are no maximum loan limits, which means that you can potentially borrow enough to cover the entire cost of the property. On the flip side, there are more strict inspection requirements for VA that the duplex must adhere to in order to qualify.

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