Pros and Cons of Investing in a Duplex as a First-Time Real Estate Investor

Dated: July 15 2020

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If I have a house that has two units with two different entrances, it is a duplex. It is often called a multi-family home, considering that it can occupy two different families. It is common to see experts recommend duplex as the ideal investment property for new real estate investors.

While this is not entirely bad advice, you must know the reasons behind this recommendation. This post will discuss all you need to know about the duplex and the reasons you should put your money on it (or not) as a new real estate investor.

Is buying a duplex a sound investment call as a newbie?

If you are looking to invest in a duplex as your first real estate investment, I am about to give you a few valid reasons to do so.

1. Seamless financing.

You have a couple of financing options to choose from when buying a rental property. In the case of a duplex, you can finance the purchase with the usual mortgage – the first option. Alternatively, you can go with an owner-occupied loan, i.e., getting a loan under the condition of being a resident in the property. The last option is to go with an owner-financing loan, i.e., paying directly to the seller rather than the bank. All of these financing options are easy and efficient.

2. Excellent rental income.

Either single-family or multi-family homes, the goal is to make maximum rental income from them. Fortunately, duplex is a real estate investment property that offers 2x the regular rental income if you rent the two units. Alternatively, renting one and occupying the other unit still fetches a good rental income while providing you with a decent residence. You are making money either way.

3. Great tax benefits.

Tax advantages are involved in almost all types of real estate investment properties. The landlord enjoys tax deductions on a couple of property expenses. This, however, depends on the state legislature of the property area. Some states offer better tax regulations on real estate investments than others.

4. Ease into the real estate investment landscape.

Opting for a duplex as your first real estate investment property is the easiest way to get familiar with real estate. It presents you with the first-hand experience of being a landlord, with little risks. You also get used to tenant recruitment and management, as well as the purchasing process of investment properties.

5. Duplexes are cheaper.

Multi-family homes with multiple units will cost more than a duplex. So, if you are working with a rather tight budget, buying a duplex will be the best option.

6. Be a landlord and an investor.

When you buy a duplex, you can decide to be a landlord and an investor or an investor only. You can live in the property and still invest by renting the other unit - as the landlord. The rent income can be used to pay your mortgage. It is not only fun but also satisfactory to see your tenants pay for your mortgage. Is buying a duplex a poor investment call as a newbie? It is not strange to see new investors show hesitations in buying a duplex.

If you wonder why this is so, I have some valid reasons for that too.

1. Tenant recruitment and management.

Ending up with bad tenants is the worst nightmare of any duplex owner. It is even worse if you are a resident and a landlord at the same time. Many investors opt for single-family homes for the sole reason of avoiding this. However, if you have no problem dealing with tenants in your property, this will not be a downside. Alternatively, you can work with a property management firm to serve as an intermediary between you and the tenants. For the best results, you should hire a management firm before admitting any tenant.

2. Late-night calls.

Another downside of buying a duplex is the unending late-night calls that may come from your tenants. Attending to incessant calls and emergencies can be draining for you, or worse if your tenants are careless people. Again, you can save yourself from this by hiring a property management company to handle the screening, admission, and management of tenants. Investment Expenses associated with buying a duplex One mistake beginner real estate investors make is to ignore the expenses involved in the buying process when making their financial plan. To help you avoid this, I have highlighted the expenses you should consider when buying a duplex.

Mortgage Payments – Mortgage payments are payable every month to your lender. The exact amount should be predetermined before you enter into the mortgage. You may ignore this if you are paying all in cash for the property.

Down Payment – You will be required to make a down payment if you intend to finance the property purchase via a mortgage. The down payment is usually around 20%, although you may find lenders that accept less.

Taxes – Although you will get some tax benefits, you should be prepared to pay some taxes. Know these taxes and their exact values, and factor them in your financial plan.

Utility and Maintenance Expenses – The usual expenses on water, gas, electricity, and other utilities are also applicable here. You should also prepare to spend regularly on maintenance as recurrent expenses.

Home Inspection – Home inspection is essential when you are scouting for an investment property to buy. Hiring a professional inspector will come at a cost.

Unplanned Expenses – It is practically impossible to envisage all expenses that will arise in respect of a property. So, you should make some provisions for these.

Real Estate Agent fees – The role of a real estate agent in the buying process of a rental property cannot be overemphasized. Their services come at a cost – a predetermined commission from both you and the seller.

Property Management Fees – I have mentioned the role of a property manager in the previous parts of this post. You will need to pay for their services, except you want to be your own property manager.

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