Is a Duplex a Good Investment?
So, you are looking to buy a home...and somewhere along the line you start thinking about buying a duplex.
You crunch the numbers and realize you can save some extra money by renting out the other half, but is it really worth it?
Of course you've heard the tenant horror stories about people trashing their apartments, never paying rent, terrible eviction stories.
But, you've also seen those people on TV who are making a fortune in real estate.
So, who is right? Is a duplex a good investment or should you just look for a single-family home? I'm going to cut through the noise and lay it all out for you.
I will also show you exactly how the income and expenses break down. So keep reading.
Investing in a Duplex
Owning property is never something to be taken lightly, regardless if it's your home or rental property. It's even more important to understand what you are getting into if it's rental property.
So first let's take a look at the pros and cons of buying a duplex instead of a single family home.
Reasons for buying a Duplex
Here are the top reasons people consider before duplex investing
1. Rent Income
The number one reason for investing in duplexes is the rent income. The cost to buy the house isn't much more than if you bought a single family home, but you can get some rent income to offset those expenses.
Often a duplex can be cheaper than a similarly sized single-family. So, you can get a nice place to live and an attached apartment for less per square foot than a detached house.
The rent on a duplex is far higher than apartments because it's basically a single family home though it's attached on one side.
Having a front and back yard along with a driveway are major considerations when families are looking for apartments to rent.
2. Tax write offs
This is another huge factor to consider when considering if you should invest in a duplex.
If you buy a lawnmower, gas, oil, and cut the grass, this is money out of your pocket.
If you own a duplex, this is now a business expense, along with the trip to the store to buy it.
You will find that all the maintenance you would do anyhow can come off your taxes (or at least some portion of it). This can lead to literally thousands in tax savings for things you would have to do anyhow!
You can also write off a portion of your utilities and other expenses if you have a home office to manage the rental property.
As always, you need to consult with your tax professional to understand the intricacies of it all.
3. It's a Good introduction to real estate investing
Have you ever thought about buying rental property and becoming a real estate investor, achieving financial independence, and retiring young? Of course you have - everyone has.
The reality is that real estate is the easiest and most proven way to become wealthy. Rental property beats the stock market by at least 2-3x.
Consider the duplex like a "Real Estate Investing 101" course. You will learn a lot from it but it's not that risky. You live right next to it and can monitor the tenant. Even if you have no rent, you are no worse off (you were going to get a single family residence with no rent, remember?).
This is why you should invest in duplex property, gain the education while getting paid for it, then leverage it into more property. You can find a step-by-step guide to achieving financial independence.
Reasons You Shouldn't Buy a Duplex
The reasons to invest in a duplex are pretty convincing, but there is a negative side to everything. Here are some key reasons why people shy away from duplexes.
1. Bad Tenants
The biggest reason people are scared of duplex investing is the potential for bad tenants. Not only do you have to deal with the financial consequences of a bad tenant, but now you have to live next to them. This fear can be overwhelming to some people.
This is a real concern and it is completely legitimate.
I would say that the best way to avoid this is to become an expert at tenant screening.
Imagine you were going to let a stranger live in one of your bedrooms. You would absolutely scrutinize every detail about them before letting them through the door. Why wouldn't you hold that same standard for your neighbors?
2. Late night calls and Leaky Toilets
I always find this one funny. Everyone I know who hasn't started investing in real estate says they don't want late night calls or having to fix a leaky toilet.
First off, how often do you have a late night emergency at your current home/apartment? So, how often do you think your tenant will have a late night emergency?
And yes, toilets and faucets leak. So won't the one in your house that you will have to fix anyhow. You aren't buying a huge portfolio, is one or two extra fixtures really a lot?
Plus you could always hire a plumber if you hate it that much.
Let's just call it what it is - an excuse.
3. Fear of Losing Money
Deep down, most people are terrified of losing their money.
People are won't invest in a duplex because they simple want to protect their money. The desire is natural and understandable.
So, this is a perfect transition into the financial aspects of investing in duplexes.
A Duplex Costs less and You Earn Passive Income.
I already explained that a duplex generally costs less per square foot than a single family residence.
The month to month expenses are similar too - you still have one roof, one foundation, one tax bill and one plot of land to maintain. Hopefully the utilities are sub-metered but if they aren't you can split that too.
Let's look at an example with easy round numbers.
Say your yearly expenses on a single family home are:
- Maintenance - $1000
- Repairs - $1000
- Taxes - $2000
- Mortgage - $7000
- Insurance - $1200
- Total - $12,200
Now, even if we use a crazy number and assume all the expenses are 25% higher for a duplex (this is unrealistically high, but I'm using it to illustrate a point), your new expenses are
- Maintenance - $1250
- Repairs - $1250
- Taxes - $2500
- Mortgage - $8750
- Insurance - $1500
- Total Expenses- $15,250
- Income ($1000/month) - $12,000
- Profit/Loss - ($3,250)
In this example, you are saving $8950 a year ($12200-3250) by having the duplex investment.
Even though you are still spending money each year, you are actually saving a lot! You can use that savings to pay bills, invest, pay for college, or anything else you want to do.
A Duplex can Build Wealth and a Single Family can not
Alright, let's run through a quick math exercise. Let's say the above example is for a house worth $150,000, your mortgage is at 4% and the national average for appreciation of homes is around 3% per year.
Single Family Residence:
- Appreciation: $4,500
- Costs: $11,200 (Maintenance, taxes, insurance, and interest)
- Change in net worth: -$6,700
- Appreciation: $4,500
- Costs: $12,500 (I also took out principal payments)
- Income: $12,000
- Change in net worth: $4000
As you can see, a house will actually suck money out of your pocket every year while a smart investment in a duplex can raise your net-worth month after month.
A Duplex is an Asset A house is not
Most people will eventually move out of their first home and into a second home.
People generally do that by selling the first house in order to afford the second one. Selling costs can easily reach 7-9% of the total value of the house.
Think about it, you have to have appreciation of almost 10% just to break even. Doesn't sound like a great deal to me.
With your duplex, you can move out and rent out both halves. Now you will have positive cash flow each and every month.
Plus, this income may even help you qualify for your mortgage on your next home. In this example, if you moved and rented both sides, you would be earning an additional $8750/year or $729/month.
What would you do with an extra $700 per month?