8 Steps to Ownership: The Duplex Purchasing Process

Going From “Buyer” to “Owner”

Choosing a Realtor

It might not mean much to you to hear from us about picking a great Realtor – after all, we’re Realtors ourselves.

Even so, we have to assert this to anyone who will listen: the realtor you choose is an absolutely essential part of ensuring that your process is successful and that you end up in a property that makes sense for you.

Why?

Because as a duplex owner, you probably have entirely different goals than those buying single-family homes. You likely value the property that you’re trying to buy as an asset – one that can either make you a profit or reduce your living expense.

If you don’t pick a Realtor that understands this and knows what to do about it, then you might end up in a property that would make great sense for someone with the goal of buying a single-family but zero sense for you.

Some agents just don’t understand duplexes or the buying process that’s associated with them. That’s just a reality that goes along with picking a unique segment of the real estate market to focus on.

Getting Pre-Approved

Everyone knows why getting pre-approved for a mortgage matters. If you skip this step, then no one’s going to take your offer seriously (unless you’re planning to pay in cash.)

But don’t glaze over this section because you’ve been pre-approved before or think you know what to expect. The fact of the matter is that qualifying for a duplex looks just a little bit different than qualifying for a single-family home.

Believe it or not, you’re likely able to afford more of a duplex than you could a single-family home. Rental property competent mortgage lenders are able to make use of a special program that allows you to consider about 70 – 75% of the expected rental income that a property could generate as your income when you qualify. That means that your “income” that’s used to qualify could go up by $500, $700, or even $1,200 – all depending on what a unit in your property could rent for.

First-time homeowners looking at duplexes should also be aware that duplexes DO qualify as properties that can be purchased with FHA financing. Other than these and a few other differences here and there, rest assured that you won’t be completely lost in the duplex qualifying process. If you’ve qualified for a home before or know anything about the process, than many parts of the duplex qualifying process will look similiar or identical to what you’re already familiar with.

Understanding Your Goals

We mentioned earlier that single-family buyers and duplex buyers often have different goals. What we haven’t mentioned yet is that many duplex owners have different goals even when compared to other duplex buyers.

Some buyers plan to rent out one side of a duplex simply to subsidize their mortgage.

Other buyers plan to rent out both sides of a property in order to generate a profit.

Still others are looking for an opportunity to start or build a real estate portfolio while many never plan on owning more than one property.

The key to all of this is deciding what your priorities are and how owning a duplex could be a stepping stone along the way to whatever your end goal is. Based on this, the kind of duplex you want to buy may differ.

Picking Out Neighborhoods

Duplexes are all over Minneapolis and St. Paul. So where do you want to end up?

Just about every buyer has a different idea of the ideal neighborhood. For some, it’s the neighborhood that drives the highest rent or the one that has the best chance at appreciation. In other cases, great neighborhoods are more about living conditions.

For owner-occupiers especially, there is a lot to consider when picking out the neighborhood that you’re planning to live in. You might not be interested in being far from work or near lots of crime, so take all of that into consideration when you pull up a map or a property from your searching.

Also take into account what the rental market looks like in each neighborhood: who is it that’s renting there and what are they paying? What does the vacancy rate look like? Answering these questions will be extremely important to your bottom line.

Seeing Properties

It’s rarely a great idea to make an offer on the first duplex you see. Instead, focus on getting an understanding for the market and what a property should look like in your budget range.

From there, you’ll start understanding more and more about the rental income a property could drive, the quality of living you can expect, and so much more.

Knowing Your Numbers

Numbers play an important part in any duplex transaction. If your numbers don’t make sense in the real estate investment world, then you could end up with a property that’s hard to sell when it’s time to move on.

You might also find that buying a duplex with numbers that don’t add up could lead you towards having a liability on your hands once again – not an asset as you might have hoped. So what kind of rental income should you hope to generate? What kind of expenses should you anticipate?

Obviously answering both of these questions in full would be impossible since every situation is just a little bit different. However, there are some general rules to consider that many investors use as their standard.

The 1% Rule (for Rental Income)

The 1% Rule suggests that the total rental income your property generates each month should equal out to be 1% of the total price you purchased that same property for.

Forget the fact that you might be intending to owner-occupy one of the units. Knowing whether your property qualifies for the 1% rule is still valuable. If you purchase a duplex for $200,000, then your property should also be able to generate $2,000 a month in rental income from both sides combined. In a general sense, this amount of rental income allows for profitability even with all of the expenses that come along with property ownership.

The 1% Rule (for Home Repairs)

Interestingly enough, the 1% rule used to determine if rental income is high enough can also be used to help determine your repair budget. Experts recommend setting aside anywhere from 1-3% of your home’s total value for repairs on an annual basis. In the $200,000 purchase price example we used earlier, our goal would be to set aside $2,000 per year for repairs and maintenance. If you’re purchasing an older property, you might want to venture to save up to 2 or 3% of the property’s value each year for repairs.

Making a Competitive Offer

The problem with buying duplexes is that other people are buying them too. (Go figure.)

In many cases, a great deal can slip through your fingers at the hands of another investor who offered something just a little bit more appealing.

Don’t take this as blanket advice, because every situation is different, but in many cases, you may need to sweeten the pot to tempt property owners to accept your offer.

How can you do that? There are several ways: offering cash, increasing your down payment, putting down more earnest money, waiving inspections, etc. We wouldn’t necessarily recommend some of these options, but know that other buyers will definitely be making use of them.

Financing types can also play a role here, so be aware of that if you’re utilizing FHA or VA loans.

Becoming a Duplex Owner

Once you’ve made an offer that’s accepted, you’re ready to transition into duplex ownership! By the time you close, you should be prepared with a strategy for making necessary repairs, attracting renters, and managing your property. It can be intimidating for a first-timer, but you’ll likely find that you’re able to learn quickly and enjoy all that duplex ownership has to offer.