Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Is Investing In Duplexes A Good Strategy?

Written by Than Merrill

Key Takeaways

  • Investing in duplexes is a great way to start investing in real estate.
  • Buying duplexes may be intimidating to the novice investor, but I can assure you it may be the best move for investors without any experience under their belt.
  • Carefully weigh the positives and negatives of a duplex investment strategy before you decide to commit.

Is investing in duplexes a good strategy? It is a simple question, but nonetheless a pertinent one. After all, there are several viable exit strategies worth an investor’s consideration. It only makes sense that a savvy entrepreneur would vet their choices accordingly. It is worth noting, however, that new investors should be prepared to ask the same questions.

There are new investors entering the business every day; some are making the shift from established careers, while others are looking to purchase their first piece of real estate. Of course, there is no right or wrong way to get started, as long as you are comfortable with the path you choose. Regardless of your particular experience, there is a perfect type of property waiting for you.  It is, therefore, up to you to find out where your comfort zone starts and ends.

Relatively new investors may want to consider buying duplexes. By investing in duplexes, or two-family house, you can enjoy the benefits of real estate ownership. However, duplexes may have more upside than you originally anticipated. Many new investors may be unaware that such a purchase serves to mitigate risk and promote future investments. If you are new to the industry and want to get started off on the right foot, consider the benefits of buying duplexes; you may find that you like what you see.

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Buying duplexes

Benefits Of Buying Duplexes

A proper duplex investing strategy has the potential to elevate an investor’s career to a new level. Done correctly, there’s absolutely no reason an investor couldn’t realize one, or all, of the following benefits of buying duplexes:

  • Rental Income
  • Cash Flow
  • Build Up Equity
  • Tenants Pay Mortgage Obligations
  • Tax Shealter
  • Great Beginner Strategy

The biggest advantage to buying a duplex is the ability to have a tenant cover some or all of the current mortgage payment. Two-family properties are underwritten with many of the same guidelines as single-family properties; you can take advantage of low down payment options with FHA or conventional loans. Down payments can be as low as 3.5% of the purchase price and can come from your existing savings or can even be a gift from an eligible family member. With home prices still not fully recovered in many parts of the country, there are many great two-family properties that can be had with minimal down payment at or below market value. This is your best option if you don’t have access to a large amount of funds and are looking for a place to live and invest.

If your mortgage payment is $1,200 and the tenant on the other side of the property is paying $1,200, you are living in the house for next to nothing. This allows you to save a good amount of money for future purchases – all the while living in a property you own. Instead of throwing money away to a landlord, you will have something to show for your investment. What you have is a real property that you can live in for as long as you like or keep as part of your long term investment portfolio. The best part is that you got started with a minimal down payment and you have instant cash flow as soon as you find a tenant.

Tax benefits and the possibility of future appreciation make buying a duplex more appealing than other types of investment strategies. Every successful investor gets their start somewhere. It really doesn’t matter how you get started, as long as you make the commitment and start. If you have the opportunity and the means, buying a duplex can be the best way to get acquainted with the business and plant the seeds of long term wealth. This is just one way to enter the business, but it is the most economical and can be the most educational. It can also provide with you long term gains that you may not even realize at the current moment. Buying a duplex, or any investment purchase, can be the best real estate decision you will ever make.

Risks Of Invsting In Duplexes

Investing in duplexes, not unlike every other investment strategy, is not without its risks. If for nothing else, there isn’t an investment that doesn’t have at least some degree of risk. Therefore, it’s important to understand that while buying a duplex and renting out half can result in a great strategy, there are risks that warrant your consideration, not the least of which include:

  • Vacancies
  • Bad Tenants
  • Maintenance Issues
  • Late Payments

I want to make it abundantly clear: Investing in duplexes can be a great career choice, but there are certainly risks you need to be aware of. If for nothing else, knowing what not to do is just as important as knowing what to do (if not more so).

The single biggest risk of investing in duplexes is, without a doubt, vacancies.  Vacancies, or unites that go unrented, cost investors money every single day they go without a tenant.  And while profit margins will vary from unit to unit, even the best duplex investors can’t make money if they aren’t renting out their assets. Instead of collecting money, vacancies can actually eat away at your bottomline, or even ruin it altogether. Vacancies are, therefore, best left avoided. It might sound like common sense, but it’s worth stating: duplex investors need to do everything they can to avoid vacancies.  When units go unrented, they will end up costing money, as opposed to making it.

While it is in a duplex investor’s best interest to rent out there units, they need to make absolutely certain that they rent to the right people, otherwise the run the risk of running into another, well, risk. While vacancies are best left avoided, they may be even better than poor tenants. A bad tenant can actually be more costly than a vacancy if the right situations present themselves. So instead of settling for just any tenants, make sure you vet them accordingly. The best way to make duplex investing a profitable endeavor is to fill the unit with the right renters.

Financing A Duplex

There are other benefits that will help you in your investing career. Going through the mortgage approval process and closing will give you some experience on how it works and what is needed. It can be eye opening if you are going through it for your first time. You will be made aware of where the closing costs go, how long the process takes and the last minute items that always seem to pop up. Once you get through the closing, you will also have to become a quick study on the rental process. Finding a good tenant is the key to being a good landlord if you have a duplex, single-family or 30 unit commercial building. You will learn the application and lease agreement process, as well as how it is to deal with an actual tenant. Your situation is a little different, seeing as how you are living in the same property as your tenant, but many of the issues you will deal with are the same. This will help you prepare a contractor list and network yourself to anyone that you may need to do work on your property. Each tenant is a new adventure, but if the process is something you enjoy and can easily handle, you may be ready for a bigger workload and subsequent properties.

The steps to acquire a duplex are much the same as you would take for any other property. It starts with compiling the items needed for lender approval. Income, assets, down payment and credit score are the four main areas that lenders look at. You need to be fairly strong in at least three of the four areas to get approved. Having a good credit score, but minimal income, is not enough in today’s mortgage market. The sooner you know what you are approved for or what items you need to improve your application, the sooner you can start looking. From there, you can call around to some local realtors and have them show you houses in your price range and make an offer. Your realtor will handle most of the purchase and offer tasks for you, especially if this is your first purchase. If you have no idea what you are looking for, take a look on the Internet and see what is available in your area. The more knowledge you have going into the process, the better equipped you will be to make good decisions on where and what types of properties you want.

Is A Duplex Investment Strategy Right For You?

Done correctly, I maintain that investing in duplexes can be a great move, which begs the question: Is a duplex investment strategy right for you? While investing in two-unit assets has proven it belongs in an investor’s portfolio, you need to make absolutely certain it can provide what you want. Take what you learned here and apply it to your own portfolio. Would investing in duplexes work towards your end-game, or detract from it? Is buying a duplex a good investment for where you are at in your career? Now is the time to ask the important questions; make sure you want want duplex investing has to offer before you take the plunge.