How To Buy a Duplex

Quick Answer

Buying a duplex may provide great cash flow. You can also live in one unit and rent the other one, using the incoming rent to cover some, or all, of your mortgage payment. Still, understanding the potential roadblocks of buying a duplex is essential.

A housing duplex that is colored in black and white.

Owning real estate, particularly rental properties, is a time-tested way to build wealth. Still, many homebuyers can't afford to buy multiple single-family homes while still making payments on their primary residence.

One way to build your real estate portfolio and create a healthy cash flow is by buying a duplex. You can live in one unit and rent out the other. Alternatively, you can rent both units and receive two rental income streams.

The process of buying a duplex is much like the process of buying a single-family home, but higher costs, limited market availability and zoning limitations can make buying a duplex more challenging. While buying a duplex can definitely be a smart move, there are certain roadblocks to keep in mind, as this guide will cover.

What Is a Duplex?

Legal definitions may differ slightly by jurisdiction, but the generally accepted definition is that a duplex is a singular structure that includes two housing units. The housing units may have one unit stacked above the other on separate floors, or the two units could sit side-by-side, separated by a common wall.

In either case, duplexes typically have separate entrances for each unit. Other multifamily investment properties include triplexes and quadruplexes, with three and four units, respectively.

Perhaps the biggest advantage of purchasing a duplex is that you can acquire two units in one transaction. You can live in one unit and rent out the other, using your tenant's rent to pay for most or perhaps all of your mortgage. However, many duplex owners prefer to rent both units for maximum rental income to pay down the mortgage.

What Is the Process of Buying a Duplex?

Buying a duplex is a lot like buying a single-family home, although finding the ideal property and qualified tenants can be challenging. Follow these steps to purchase your multifamily duplex property:

  1. Get preapproved. Getting preapproved for a mortgage is a vital step in the process of buying a duplex. When a lender preapproves you for a mortgage loan, you'll receive a preapproval letter that shows how much you can borrow to purchase a property. It also demonstrates to sellers and real estate agents that you're a serious buyer.
  2. Find a duplex to buy. Finding a suitable duplex may be tricky because of limited multifamily property options on the market. Online property marketplaces like Realtor.com and Zillow can be helpful tools for finding available properties. Even better, choosing a real estate agent with experience working with investors can be invaluable when it comes to finding and purchasing the perfect duplex.

    Ask your agent to supply you with comparable rental properties for the area so you'll have an approximate idea of the property's income potential.

  3. Finance the property. If you plan on occupying one of the units, you can apply for an FHA, VA or conventional loan; investors, on the other hand, are limited to conventional financing. An FHA loan may benefit first-time homebuyers with below-average credit and buyers who don't have a large down payment.

    With a credit score of 580 or higher, you might qualify for an FHA loan with only a 3.5% down payment, while eligible applicants can qualify for a VA loan with no down payment. But if you don't qualify for a government-backed loan, you'll have to come up with a higher down payment and pay higher interest rates.

    You may qualify for more than you might think because some lenders allow you to use 75% of your projected rental income to qualify for a loan. In this case, you'll have to provide a current lease agreement or a rental schedule from an appraiser.

  4. Move into the duplex. If you choose to live in the duplex, you can move in once the loan closes and you receive the keys to the property. If someone currently lives in the other unit, you may want to inform them when you'll arrive with your moving truck, especially if you share a driveway.
  5. Rent the property. A vacant property stops the cash from coming in, but it doesn't stop your mortgage, tax and property maintenance obligations. If your duplex doesn't have tenants, working with a real estate agent who can help you find qualified tenants and keep the rent coming in may make sense.

How Is Buying a Duplex Different From Buying a Single-Family Home?

Owning a duplex has its advantages, like covering your mortgage—or at least a substantial portion of it—with rental income. Still, you're likely to encounter difficulties that a single-family homebuyer might not face. Consider the following concerns before you buy your first duplex:

  • Home price: The price per square foot of a duplex is usually higher than for single-family homes, depending on the location. That means your down payment may be higher as it's based on a more expensive property.
  • Neighborhood location: Since many neighborhoods have zoning ordinances prohibiting multifamily housing, you may not be able to purchase a duplex in your desired area. Generally, urban areas have more duplexes, triplexes and other multifamily housing options, while suburban areas have mostly single-family homes.
  • Higher cost to insure: Generally, homeowners insurance is more expensive with a duplex because there is double the risk of a claim being made by the tenant or a guest.
  • Complex taxes: Your taxes will likely be more complicated as a landlord. The IRS even publishes a residential rental guide to help you comply with their rules. Complicated taxes may be worth it, however, since you may be eligible to write off a portion of your property taxes, mortgage interest and maintenance expenses for the rental unit. Finding an accountant experienced in dealing with this type of tax situation may be well worth the extra money.
  • Finding tenants: Reliable renters are a landlord's dream, but finding them can take considerable time. Additionally, you'll have to go through the process every time tenants move out. Consider how much time you're willing or able to commit to finding qualified tenants before you buy a duplex. Working with a property management company or real estate agent to find qualified tenants can help, but that will cut into your bottom line.

Get Your Credit in Shape Before You Buy

When you apply for a mortgage to buy a duplex, your lender will request your credit report and credit score from at least one of the three national credit bureaus (Experian, TransUnion and Equifax). Your lender may deny your application if your credit score falls below their minimum score requirement, which varies by lender. You may be approved for a conventional loan with a score as low as 620, but you're more likely to qualify with a score of 660 or better.

Before you apply for a mortgage, check your credit report and credit score for free with Experian to get a clear view of your credit picture. Take steps to improve your credit, like disputing any incorrect information in your credit report and paying down debt. With a stronger credit score, you may have better mortgage options and lower interest rates to save money over the life of your loan.

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