Duplexes are the easiest way to start off in real estate investing.
The major difference between a wealthy person and a person with average wealth is this: wealthy people leverage the power of other people’s time and money. Plus, they build up appreciating or income-producing investments.
Wealth comes from leveraging and harnessing other people’s time and money.
Rather than waiting for a company to hand them a paycheck, the wealthy head out to build up income-producing assets such as real estate, businesses, and equity positions through stocks or lending.
The wealthy typically aren’t the fat cat CEOs the media tells you about. In fact, they’re usually entrepreneurial people that position themselves to organize other people and resources to produce profits.
While most of America is aware that they “should” invest into something like a 401k or a savings account, too few people actually do it, which has lead to the coming disaster of Baby Boomer Retirement Shortages.
That said, 401ks and stock market investments are still only a small fraction of what the wealthy leverage to amass wealth – they are usually very active in real estate and businesses ownership.
There are two types of real estate investments: buy & hold and buy & sell.
Buy & Hold
In buy and hold real estate, the goal is to purchase a property and rent it out. The rest is just like the name suggests – those who buy and hold typically keep a property in their portfolio for some time to enjoy the cash that rental income produces as well as a growing amount of equity in the property.
Buy & Sell
On the other hand, there’s buy and sell real estate. This is the kind of real estate investment that all of the TV shows you’re familiar with like to talk about. The goal is to buy low and sell high. That goal is often accomplished by working on a carefully managed house flip.
Even though buy & sell real estate gets all the attention, there are actually four very compelling reasons to consider buy & hold.
1 – You Can Use the Bank’s Money to Purchase With a Mortgage
2 – You Use a Tenant’s Income to Pay Off the Mortgage
3 – Rental Real Estate Income Has Massive Tax Deductions and Isn’t Subject to Self-Employment Taxes
4 – It’s a Consumer Defensive Investment that Tends to do Well During Economic Downturns as Well as Bull Markets
Real estate is an amazing wealth building tool, but it’s often viewed as accessible only to people that already have large sums of money to use as a down payment. But that’s where duplexes, triplexes, and four-plexes come into play.
Besides real estate investing, most wealthy people are leveraging beneficial tax laws, other people’s capital, and other people’s labor hours to produce income as a business owner.
Real estate and business ownership are the two major differences between your typical middle-class person and the truly wealthy in our country. This article isn’t about cheating your way to the top by evading taxes or cheating other people out of their money. It is about wisely utilizing the opportunities that are legally available to you via lending from a bank and the currently existing tax code here in America.
We want to help maximize the efforts people put into their work, and we want to help more people build financial momentum. That’s why we want to help people understand how to step into real estate ownership. In many cases, it’s best to start with a duplex, so that’s where our focus will be for the remainder of this article.
Using a duplex to start real estate investing flies a little bit under the radar. Some people have heard of it, others haven’t, but either way – few realize how easy it is to get going.
There are two kinds of duplex buyers: owner-occupiers and investors. While owner-occupiers are investors too, they’re a unique kind of investor because they actually live in the property. In many cases, this kind of investor is utilizing the rental payment from the other side of the property to pay their mortgage or help with other expenses. The income is largely supplementary.
“True” investors, on the other hand, are those that buy a property with zero intention to live in. They make the purchase strictly to enjoy rental income that comes in from both sides of a duplex. They may also invest with the intention of building up equity in the property so that they can sell it for a massive profit years down the road.
While “true” investors are the ones buying most kinds of investment properties, duplexes are unique because they can be “owner-occupied”.
If you’re reading this article and wondering a little bit about who the authors are, this section is for you. Learn more about our experienced team members, The Duplex Doctors, here.
At Duplex Doctors we work exclusively with multi-family investment properties, particularly Duplexes, so you can be confident that we are in tune with the market. We’re passionate about helping people build financial momentum with duplexes and multifamily properties. We don’t come at this space like an outside consultant would. Each of us has actually been in an investor’s shoes. At some point or another, we’ve all owned, invested in, or owner-occupied duplexes, triplexes, and fourplexes.
This duplex buying guide is meant to help more people understand how to use these amazing financial tools. Financial education gets muddled with sales presentations when it comes to so-called financial advisors and gurus. We’re not that – we simply think duplexes, triplexes and four-plexes are some of the best-kept secrets in the financial world, and they empower people to start investing in real estate.
You don’t always need a college degree to become wealthy – building wealth simply requires wisdom and discipline.
With so many people burdened with student loans, we want to inspire some folks to go out and improve our communities with rental property opportunities. Rental property owners have the potential to provide solutions to the housing shortage.
So without further ado – here’s how to buy a duplex!
Buying a home is scary and the thought of buying anything more complex than that can be even scarier.
It’s easy to think that if a single-family home purchase is a headache, a duplex or triplex should at least double or triple the headaches.
Buying a duplex, triplex or fourplex is not difficult – but there are some additional steps and precautions you have to go through. You’ll want to employ a duplex specialist like The Duplex Doctors to help you navigate the buying process.
Lastly – this is a how-to for people that are newer to the subject of duplex and triplex investing.
If you’re already an expert, we’d love to see additional tips in the comment sections and also have you help us create content – we’re looking for guest writers and Youtubers to help us build up the best investment real estate guides possible.
The first step in buying a duplex is to define your goals and understand the different opportunities available for real estate investors.
One of the top reasons why people purchase duplexes, triplexes, and fourplexes is because they want to live with lower costs. If you purchase a multifamily home and have tenants, chances are that you can drastically lower your monthly expenses.
Some people don’t want to build a real estate empire or investment portfolio, they just want the flexibility associated with having somebody else pay their bills and the mortgage payment.
With a duplex, someone else can help to pay your mortgage.
Owner-occupied or investment duplexes can be one of the best first steps in building wealth.
You can easily build wealth with little to no money down by using easily accessible financing such as FHA, VA, and conventional mortgages.
You can build wealth with the same transaction you use to house yourself.
This means you can leverage financing meant for home buyers to build up real estate investments.
You do this by purchasing the duplex as an owner-occupied property. Once you’ve fulfilled the legal requirements of the mortgage or FHA program by living in the property for at least a year, you can find a tenant for the unit you were living in and then go out and purchase another duplex, triplex, or quad with the same types of financing. We’ll dive more into this later.
A duplex can be the first rung in the ladder of serious real estate wealth building.
Another goal people have is to buy a duplex as a starter home that will eventually finance their dream home.
Live in a duplex for a couple of years so that you can move out and use the positive cash flow to finance your dream home.
If you buy a duplex as an owner-occupant, live in it for a year, and then move out, chances are that you will see positive cash flow when you replace yourself and have two renters instead of just one.
We’ve seen many people go through a year of owner-occupying a duplex just so it can finance the mortgage of their dream home.
You can read about the BRRR method here, which can be a fantastic method for acquiring properties that need renovating before renting them out for great positive cash-flow.
You can also buy a duplex through the 203K and home renovation loans through Fannie or Freddie or use construction loans to do what Chip and Joanna Gaines do on their television show “Fixer Upper.”
Each renovation has their own set of complexities, but many duplexes were built in the mid to early 20th century and can become stunning properties that would draw exceptional rental income if they were renovated.
You can use a duplex or triplex to do some amazing fixer uppers and translate that into considerable investment property income.
Many people want to build a real estate portfolio.
Real estate investments can be a great way to make a living, and they’re legitimately powerful wealth-building machines when executed properly.
Duplexes are low complexity properties when compared to apartments or larger multi-families.
If your goal is to build a real estate portfolio, duplexes and triplexes and even four-plexes can prove to be easier to manage than other multi-family housing.
A duplex is much easier to manage than an apartment building and you tend to get less intervention from the government and other regulatory authorities when you’re working with duplexes, triplexes and quads.
Another goal that people will have a simply to on investments that aren’t like your traditional stock, bond or cash.
The government provides beneficial tax treatment for job creation, housing creation, and agriculture among other things. This means that there is some beneficial tax treatment when you become a landlord.
Duplexes, triplexes, and quads are also investments that have less of a correlation then you’d see from various sectors or diverse capitalization stock.
While mutual funds can obviously provide great diversification, the entire stock market tends to react in a fairly similar way.
In summary, all stocks tend to move in a correlated manner. Tangible assets, however, show less correlation.
Physical rental real estate does provide some tax advantages and tax diversification, but it also tends to be a consumer defensive investment that reacts differently than more traditional investments.
Rental real estate provides an alternative investment and tax diversification.
Conclusion About Goals and Vision
You can do lots of different things with rental real estate and duplexes are some of the most accessible investment properties available.
Now that you know some of the different purposes that duplexes can help achieve, let’s dive into how you actually buy a duplex.
The more doors a real estate investment has, the higher return there can potentially be. However, more doors means more complexity, risk, and required management skills.
Because of this general principle, you tend to see more aggressive and professional investors pursuing properties that have more doors (units).
The more doors an investment property has, the more competitive it gets. Professional real estate investment firms and other investors aren’t as interested in duplexes and triplexes. That’s not to say that there aren’t any, but there are fewer than there would be when competing for a larger property.
Single-family homes can be easily purchased, but you’ll be the only one paying the mortgage. Many people that decide to buy a duplex had originally planned on buying a single-family home at some point.
Buying single-family homes is preferable when you need lots of square footage and don’t want the hassle of managing an investment property.
Young people and retirees both make great duplex investors because they have the flexibility to “house hack.”
This isn’t always true, but a typical duplex or triplex unit doesn’t have the massive square footage that a suburban single-family home would.
So if you’re looking for 2500 ft.² or more, you should probably increase your budget if you’re looking at a duplex. Otherwise, consider sticking with a single-family home.
Duplexes have two separate entrances and are considered as one property. They have a single owner, but two separate addresses. Duplexes are different from twin homes because twin homes have two separate owners, one on each side of the property.
Duplexes are typically the simplest multi-family properties to manage.
As an added bonus, there are way more duplexes out there than triplexes and fourplexes – at least in Minneapolis. This drives the competition down and makes purchasing just a little bit easier.
Triplexes and quads have three or four units – respectively. A triplex will generally look quite a bit like a duplex, whereas a quad will often start to appear like a small apartment building.
When you purchase a duplex and rent out the other half, that is called being an owner-occupant.
If you purchase the property and do not intend to live in it, it would be considered an investment property.
The main advantage of being an owner occupant is that you can use financing options that are primarily meant for single-family home purchases while benefiting from having a tenant paying your mortgage.
Because an owner-occupant would have access to FHA, VA, and even down payment assistance programs, people can purchase an owner-occupied duplex, triplex, or fourplex with very little down payment money.
If you were to purchase an investment property, you would face more stringent income restrictions and would have to bring 20% in cash as a down payment.
If you use conventional, FHA, or other Fannie or Freddie mortgages when owner-occupying, you will be required to live in the property for at least one year before you move out.
Not only that, but you often have additional expenses such as mortgage insurance that can eat away at your profits if you choose to use FHA financing.
Cash – Purchasing with cash is obviously an amazing option, but very few people carry around hundreds of thousands in order to buy real estate. Those that do have a big edge over the rest of the market because of this.
Conventional Loans – These loans are considered to be the standard kind of mortgage where you put down 5%, 10% or 20%. You will usually get a conventional or traditional mortgage through a bank, credit union, or other lender. They often have low interest-rates, and you can even get a fixed interest rate (which is a must).
Conventional loans might require a larger down payments than FHA,, but they typically don’t have the added expense of PMI or mortgage insurance. In the long run, they could save you thousands.
Head into your local bank or visit a mortgage lender in the area to see about financing with a conventional loan. For recommendations on mortgage lenders to work with, you can also contact us.
While banks are all held to similar standards and tend to lend in the same way, a great banker is an important part of your investment journey. They will be able to get things done for you.
It’s a very good idea to interview and connect with multiple bankers so that you can get some perspective and choose the one that seems to be the best.
Bankers and mortgage companies are NOT created equal.
Many of the mortgage companies out there are so focused on pumping out single-family, cookie cutter loans that they never get around to becoming competent in multi-family financing.
Do not borrow for a duplex or investment property until you’ve talked to two or three different lenders. You’ll gain a ton of experience this way and will learn about who is investment property competent in the area.
FHA – The government has an agency called the federal housing administration that is meant to assist banks to make loans with very low down payments.
FHA loans require down payments as low as 3.5%. With certain government programs that are often available, that can even drop to 0%, which means more people can get access to homeownership.
Most people have no idea that you can start building an investment portfolio using an FHA loan with almost no money down. It’s important to note that the cost of doing so is much higher than it is with a traditional mortgage. Profit margins will be tighter because of this, but if you crunch the numbers it may still be worth considering.
The way it works is that you can borrow to purchase a property that needs renovations, and you will be able to borrow at what the end result property might be valued at.
203k loans and renovation loans allow you to borrow at the total value of the end-project in order to fix up a property.
You can use a 203k loan, which is essentially like an FHA loan, to purchase a duplex, renovate it, fix it up, and then live in it as an owner-occupant. The key to using a 203k loan to buy an investment property is that you need to be an owner-occupant. You cannot use a 203k loan or many home renovation loans unless you are going to be an owner-occupant and live in the property for at least a year.
There are strict requirements and you will want to work with a lender that understands the 203K or home renovation loan programs.
There are many reasons 203k loans and home renovation loans are seldom used. There are bureaucracies, contractors don’t like working with them, and they’re risky and time-consuming.
That doesn’t mean they’re awful, you just need to enter into the investment with a seasoned professional,. Too few lenders want to work with these loans so finding one that can help you through the process is vital.
Why don’t lenders specialize in 203k loans and home renovation loans? Because they get paid the same origination fees for much more work – they make lower profits on much longer time frames.
Can you buy an investment property with a VA loan? Yes! Veterans can use VA loans to purchase investment properties as long as they will be owner-occupants of a property that’s the size of a duplex, triplex, or allowable multi-family home. You have to live in the property for at least a year to use the VA loan for a rental property.
There are some similarities between borrowing for a duplex and single-family, but there are also some important differences to note.
You could purchase a single-family or duplex with every single one of those financing options we listed before, but there’s an important difference when you’re purchasing a multi-family property.
For instance, consider the differences in qualifying. When qualifying for a single-family home, the qualification process looks (roughly) like this:
Income + Credit Score = Mortgage Approval Amount
When qualifying for a multi-family home:
Income + Credit Score + Projected Rental Income = Mortgage Approval Amount
When you purchase a multi-family home, you’ll be able to use the projected rental income it is expected to generate when it comes to borrowing.
This means that you would likely be approved for a higher amount if you’re purchasing a duplex, triplex, or quad when compared to a single-family home.
Thinking of buying a townhouse? Consider a duplex: the rental income will increase your mortgage approval amount.
If you were thinking of buying a townhouse or condo, you should probably connect with a lender to discuss what would happen if you looked at an owner-occupied multi-family home.
Down Payment Assistance and Government Programs for Duplex Buying
Governments will often provide down-payment assistance or other programs for purchases intended to be made in certain neighborhoods.
If you’re using an FHA loan and some of the down payment assistance programs available through local or state government, you might see that there are different opportunities with various qualities of homes, neighborhoods, and types of properties.
If you were buying in a part of town that is under a re-gentrification program, you might get special assistance if you are going to owner-occupy the property as compared to if you were simply buying it as an investment property.
You might also get various options and incentives for choosing a triplex, quad or duplex. This is where government regulation benefits those who are the most informed. It’s probably worth having a conversation with the city officials in your potential neighborhoods to see if there are any programs going on.
Understanding how much a unit or apartment might rent for is absolutely critical when purchasing a multi-family home.
In many cases, you will purchase a duplex that has tenants and lease agreements.
There are many tools available that help estimate rental income for properties, but we highly recommend working with a duplex specialist as your real estate agent so that they can provide insider knowledge advice.
The Duplex Doctors team is led by people that have owned properties themselves as well as orchestrated more deals buying and selling duplexes than any other realtor in MN.
There’s a strange problem with the potential rental income shown on the major real estate sites like Zillow, Trulia, and even broker websites because that number is typically an estimate that assumes someone would rent the entire home. Those numbers are not accurate for duplexes, triplexes and quads. Additionally, even numbers that assume the renting of just one unit are known to be off at times due to the fact that rental demand is ever-changing. You will need to do your own work to identify what the potential rent is for every unit you were looking at.
Not only will you want to identify the potential rent, but you will want to know whether the utilities are combined or separate for each property you are considering buying.
For those who intend to be owner-occupiers and generally don’t have as much experience with tenant management and estimating rents, we highly recommend seeking out professional help or advice from a mentor.
We’ve touched a little bit on the different people that you’ll want to surround yourself with in order to make the duplex buying process as easy as possible. In this section, we want to expand on that just a little bit.
If you know a mortgage lender that’s investment-competent and you want to work with that person, then in many cases, the mortgage lender is the first person you’ll want to bring onto your “team”.
Mortgage lenders have the potential to make or break an entire process if you’re not careful about who you choose. Some may not be qualified to work with investment properties and others may simply not be responsive or caring enough.
In this fast-moving market, it’s important to work with a lender that can keep up.
If you’re not sure who to pick as a mortgage lender (or if you’ve already decided on one) the next person you’ll want to employ is a real estate agent that’s a duplex specialist. Our team, The Duplex Doctors, has bought and sold more duplexes than any other realtor in MN for five years and counting. But even if you don’t choose us, do pick someone that’s worked on something outside of single-family homes in the past.
Single-family homes are valued very differently than duplexes, even if they appear to be the same on paper. The real estate agent you choose should understand that you’re not just buying a home, but an income-producing asset. Great duplex realtors can help you estimate rental income, cash flow, repair budgets, and more. They should also be aware of tenancy laws and the legalities involved with owning multi-family.
Lastly, you may want to consider bringing a property manager onto your team. For some duplex owners, working as an owner/landlord isn’t much of a problem. They’re aware that they’ll be the ones to call for emergencies, repairs, and more. They know they’ll be responsible for collecting rent and the like.
However, other duplex owners would rather cut into their profits just a little bit to avoid all of the headache associated with the job. In cases like these, the best possible solution is to hire a property manager or a management company that can take the weight off your shoulders. Professionals who do the job well are able to streamline just about everything for you so that you don’t have to worry at all.
The duplex buying process is filled with moving parts, but it is definitely possible to navigate it all and come out successful.
The first thing for potential duplex buyers to understand is this – currently, a lot of duplexes sell due to off-market deals. By a lot, we mean a lot. Recently, we observed a particular Minneapolis zip code to take a look at this and discovered that about 50% of the duplexes in that market had sold before they ever hit the market.
What does that mean? That some of the best deals are going to others – just because they’re in the know. That’s what working with real estate agents like ourselves gets you – insider knowledge. We do a large portion of our deals off the market. In many cases, we’re able to find our buyers great deals that never even went online.
One important thing to understand about rental properties is that value is perceived differently. In the city, most renters have an expectation – that they’ll need to make sacrifices to live within their budget.
Because of this, duplex buyers can rest assured that the best duplexes aren’t always the flashiest. In many cases, it’s more important to look for a place that’s clean and not in disrepair. Many aesthetic changes aren’t even necessary to make.
This all comes in stark contrast to the way homeowners think about properties. Everyone’s essentially looking for a dream home at some level or another, and they don’t want to think about living in a place that’s not up to their standard for aesthetics.
As someone who may be transitioning from a homeowner mentality to a rental property owner, this is important to keep in mind. That’s not to say that owner-occupants can’t live in beautiful units – we see it all the time! Rather, we’re suggesting that these same owner-occupants understand that their renter may not have the same list of expectations.
If you’ve found a home that you’re interested in and are planning to make an offer, try sitting down for a few moments to write a letter to the seller. It doesn’t have to be handwritten, but it should definitely be personalized.
Once you’ve finished the letter, send it off to your agent so that they can relay it to the seller.
Why?
Because just like everyone else, duplex owners have the potential to be sentimental. Many love the property that they’re selling and want to see it go into good hands. Others are interested in helping out a person who needs a break.
Whatever the case may be, it’s beneficial to help duplex owners put a face to the person they’re selling to. This is especially true for owner-occupants. Many duplex owners claim that they’d rather sell to an owner-occupant than an investor because they want to see the place go to the person who will care for it best.
That said, it isn’t always the case and to many duplex owners, money talks before anything else.
Still, it’s always worth the effort to try. In your letter, include details about yourself and your immediate family, what you loved about the property, and the like.
As a buyer, no one wants to get stuck in a scenario where multiple offers are being considered. However, this is happening all to often as of late. Because of this, it’s important that buyers make an offer that’s competitive and appealing.
This is where it’s important to have a realtor that understands duplexes and multifamily properties. In some cases, duplexes go for way over their asking price. Making a high bid in assumption of that could be wise or it could be a huge waste of money – only people who have correctly run the numbers would know on the front end.
While an offering price is one of the most effective ways to influence the process, there are other ways to do it. Tons of variables can influence the process: earnest money, down payment amounts, financing types, elevator clauses, inspection requirements, and the like.
Consider each element carefully to ensure that your offer is as competitive as possible.
For duplex owners, there’s a lot of work to do after a deal is closed. The next step is to find tenants and get the ball rolling.
There’s good news for duplex owners in today’s market – the rental market is hot. In fact, it might even be hotter than the housing market. In Minneapolis, vacancy rates have practically bottomed out and properties everywhere are getting rented right away.
That said, finding quality tenants can be a lot of work. The best possible strategy is to be extremely thorough in your screening process. Run credit checks and background checks. If possible, meet the potential tenants in person. Do whatever it takes to ensure that you’ll be working with a reliable tenant that will keep your property in great shape.
After you’ve found tenants (or perhaps even before that) make sure that you have a plan in place for how repairs and other property ownership costs will be budgeted. It’s important to ensure that you don’t end up out of money when a major emergency repair comes up.
Other things that require a budget are: potential vacancies, routine maintenance, move in/move out preparations, and (potentially) house cleaning or yard upkeep.
In most cases, the right kind of tenants don’t cause any major problems at all. Of course we’re all familiar with tenant horror stories that our friends have shared, but the reality is that most make life pretty easy.
That said, it’s certainly important, as a rental property owner, to be ready for just about anything. Don’t be caught off guard by anything and try to have a plan in place for any kind of scenario that could arise. If you do, you won’t have to be phased when things come up.
Is rental income subject to taxation? Sadly, yes. However, owning rental property does come with many tax benefits that make the burden much more manageable. There are plenty of write-offs and deductions available for property owners. In addition to that, rental income is taxed as passive income in most cases, meaning that it’s tax-advantaged in its own right.
What is Taxable?
If you’re making income from your property in any way, shape, or form, always assume that there’s a high potential for it to be subject to taxation. The IRS asserts that all income earned in a calendar year is subject to taxes in that same year – no matter when the expense will be attributed to your tenant.
If you collect first and last month’s rent, for instance, be aware that the last month – even if that’s three years from now, is subject to taxes in the year that you collect it.
Additionally, any kind of security deposit that is withheld is subject to taxation as well. If the security deposit is intended to be returned to the tenant, then there’s no need to pay taxes on it.
Write-Offs & Deductions
Almost every expense that’s associated with maintaining a property can be deducted on a tax return. According to the IRS, these deductible expenses include:
TurboTax elaborates on this a little bit and includes a much more exhaustive list on their website. Just to give you an idea, they recommend advertising, pest control, repairs, utility, and cleaning as deductible expenses.
Depreciation
Depreciation is available for assets that lose their value over time. Typically, they’re deducted over a period of several years rather than all at once. In residential rental real estate, many assets are eligible for depreciation. Typically, properties themselves are eligible as well as the land they sit on.
Major appliances, fences, and other assets are also eligible for potential depreciation. Work with your tax professional to determine how depreciation could benefit you to its maximum potential.
The great thing about duplexes is their amazing potential to create wealth. Once you get started with one, it’s much easier to get on a roll. Many of those who are looking to start an entire portfolio have gotten going by buying just a single duplex. They then use the funds generated from that property to fund their next investment.
It’s this kind of cycle that allows people with average amounts of wealth to become full-fledged real estate investors that are constantly creating additional wealth.
If you’re ready to make a move towards a duplex purchase, get in touch with us! We’re among the leading experts here in Minnesota and we’ve bought and sold more duplexes than any other realtor in the state.
Whether your goal is to supplement your income with one property or build it up with many, we’ll set you on the trajectory for success.
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