When choosing an investment property, there are many options to choose from. Many consider a small 2-family, known as a duplex. Is a duplex the right option for you?

Rental property investing is a great way to start investing your money and when starting out in real estate investing you may be wondering what type of rental property you should start with. You may not know this, but duplexes can be great properties for first-time investors.

Unlike other single family rental properties, duplexes can be a home for two families to live in. This feature alone creates many reasons why they’re the ideal real estate investment for beginners. So, let’s go over what a duplex is. Later, we’ll talk about the pros and cons of buying a duplex and the process for investing in one.

What is a duplex?

A duplex is a multifamily home with two units that are either stacked or separated by a concrete wall. Each unit has its own separate entrance and the occupants cannot access the other unit.

• Two-unit multi-level home or separated by a concrete wall
• Two separate entrances
• Tenants are completely separated

Depending on the location, duplexes might not be common since people generally want their own space. However, they are great choices for a place to live while a person works on their credit or works toward buying their own house. They are more popular in dense areas near cities.

Why buy a duplex?

Duplexes are great for beginner real estate investors. Buying a duplex can be much more profitable and far less risky than buying a single-family home.

With a duplex, you’re receiving rental income from two tenants within one property. The cost of major repairs, such as a new roof, siding, etc., would be paid for from the income of two tenants rather than only one. 

Having an extra rental unit in the property also helps protect against vacancies. With a single-family rental, if your tenant leaves, you’re left covering the cost of the entire property without receiving rent. With a duplex, you’re still receiving rent from one tenant even if one of the units is temporarily vacant. 

Buying a duplex also gives you the option to stay in one unit while renting out the other. Doing this naturally attracts more respectful tenants. This is commonly referred to as “House Hacking”

Here’s why:

Tenants who are willing to rent a unit next to their landlord are typically far more cautious of their behavior on the property.

Buying and renting a duplex can be a great source of rental income. And when you’re ready to sell the property, you can count on it having great resale value due to the limited supplies of duplexes in the country.

Pros of buying a duplex

There are many benefits to buying a duplex as a rental property. A duplex provides you with more than just rental income, it allows you to learn as a beginner real estate investor while building equity in your investment.

Another benefit to buying a duplex is that they may serve as an Airbnb rental property if they are eligible. If you live in a market with demand for short-term rentals, you may be able to supplement your rental income between tenants.

Duplexes also have great real estate value. Since a duplex will always provide cash flow for an investor, there will always be a demand for them.

• Introduces beginner real estate investors into real estate
• Builds equity
• Generates rental income
• Has good resale value
• Airbnb opportunity

Cons of buying a duplex

Some properties are built to be a duplex, but many others are converted from single-family homes. A converted property like this may have some issues that you wouldn’t find in other types of rental properties. 

The investor that converted the home may not have separately metered the electricity for both units. This is fine if you intend to include the electricity in the rent, but it leaves you committed to that model.

Duplexes that were constructed as a two-family property were normally built with soundproofing in mind, but those that used to be a single-family home are notorious for noise complaints between tenants. In some properties, tenants may be able to hear what their neighbor is saying if they’re standing in a certain place. This can lead to increased tenant turnover and vacancies.

Also, while a duplex generally provide better cash flow than a single-family rental, it’s still very limited compared to a larger multifamily property. The more units you have under one roof, the less your expenses are per unit. Having more than just two units will also keep you better protected from vacancies. If the one unit doesn’t pull in enough income to cover all expenses, you will have to go into your pocket when a vacancy occurs.

Finding a duplex for sale

Finding a duplex may not be as simple as finding a single-family home in some areas. In my home area, there are tons available, but the market in Northern New Jersey is quite different from most of America. There aren't as many on the market in most areas, and they often get sold quickly.

You can look for multi-unit rental properties on sites like Zillow, and you may even be able to find some on commercial real estate listing sites like Loopnet. You should also check out your local Multiple Listing Service to see what 2-family properties are on the market.

You should be aware that many rental properties that are on the market long enough to be found on these sites are overpriced or in poor condition. This is because the good deals usually get snatched up before they are listed.

If you contact real estate agents looking for a good investment property, be prepared to show proof of funds or the ability to get financing. Agents that work with investment properties often have other investor clients willing to buy these properties, so you want to make sure they know you're serious and capable.

One of the best ways to find a deal on a duplex, or any property for that matter, is through networking with other investors. Many cities and most social media platforms have local investor groups that you should consider joining to expand your investor network. The odds are that they know somebody who has one they're willing to sell.

Financing the purchase of a duplex

If you already have enough income to support the payment of a rental property, you should be able to get a conventional loan to purchase a duplex. If the units are already leased, the lender may count the rental income toward your income. You should know that most lenders reduce the rental income to account for vacancy.

The down payment can often be the most difficult part of buying an investment property for a new investor, and the down payment on a duplex will probably be between 20%-25%. Some lenders may allow the seller to finance a portion of the down payment, but discuss this with the lender ahead of time. This is uncommon, so don’t get your hopes up.

The loan process may be easier if you work with a lender that specializes in rental property loans. Mortgages for an investment property are considered commercial loans when they're not owner occupied. Commercial loans usually have a balloon payment in 5-10 years, and they may have a prepayment penalty during the first few years.

Duplex owners with at least one year of experience as a real estate investor are usually able to secure financing for additional rental properties more easily, so the process gets simpler as you gain experience.

Buy a duplex by “house hacking”

Duplexes provide a unique strategy for buying a property as an investment. You can potentially buy a duplex as a primary residence to take advantage of financing options like FHA loans or VA loans. This strategy is commonly referred to as “house hacking”.

This strategy works by purchasing a duplex as your primary residence, living in one unit, and renting the other unit to a tenant. FHA and VA loans allow you to do this since it will be an owner-occupied home.

The benefit to house hacking is that you can get an FHA loan with as little as 3.5% down and a VA loan for as little as $0 down. You'll also get a lower interest rate than you would with other conventional loans.

Once you've owned the duplex for a year, you can count the rental income from the second unit as income to purchase a new property. As long as you can meet Federal Housing Administration requirements, you can refinance the first duplex and use another FHA loan to buy another multifamily home. You'll just have to live in the second one as your primary residence.

Here are the steps: 

• Step 1: Find a duplex at a price you can afford the mortgage payments.
• Step 2: Purchase the property with an FHA or VA loan.
• Step 3: Live in the property for one year while collecting rent on the second unit.
• Step 4: Refinance the duplex with a conventional loan.
• Step 5: Purchase another duplex with another FHA or VA loan.
• Step 6: Move into the second duplex.
• Step 7: Find a second tenant for the first duplex.
• Step 8: Rent the second unit out in your new duplex.
• Step 9: Collect rent on three units while living in one.
• Step 10: The amount of rental income you collect now should allow you to easily finance the purchase of more rental properties.

Before renting your duplex, learn how to properly handle the rental process. This involves writing the lease, accepting deposits, setting up payments, and other business matters. If you can, find someone to talk to about the process—maybe someone who has bought and rented out a duplex before. Otherwise, read as much as you can and learn as you go.

Managing your new rental properties

Managing your duplex will be fairly easy if you live in one of the units. Property management gets more difficult when you're not already on site.

You'll want to visit the property regularly to make sure there aren't any visible problems. Things like roof damage, clogged gutters, or broken screens often go unreported by tenants. These small issues can later turn into big, expensive problems.

You also have to be diligent in collecting rent. If you make it a habit to allow late rent payments, it can quickly become the standard. It's often easier, and less expensive, to quickly get rid of a tenant that has problems paying rent. The eviction process takes time, so waiting until they are already behind can delay the time it takes to find a tenant that will pay.

It doesn't usually make sense to hire a property manager when you only own a few rental properties. As your portfolio grows, a good property manager may be well worth the management fee they charge. Having somebody to quickly handle repairs and collect rent can save you significantly more than the cost of their fees.

Is a duplex right for me?

Investing in duplex real estate is for ambitious risk-takers who want to begin their investing career. It’s for the people that fully understand the benefits of real estate investing and want to grow their portfolio with multiple units over time.

This isn’t right for someone who doesn’t want to take on responsibility or learn about the business of it. Investing in a duplex can be extremely rewarding and profitable for the people who go all in on it.

Whether a duplex is right for you or not, real estate investing is proven to be one of the most secure and profitable investments available. Besides, no other investments have the tax benefits that real estate provides.

I go into great detail on this and more in my book. After reading it, I am sure that you will have the knowledge and confidence to take being investing in real estate.

Order your copy of Create Wealth With Multifamily Real Estate Investing now by clicking the link below.