Real Estate Home Finance

Thinking About Buying a Duplex? Consider Both Sides

Multi-family homes can be a great investment or a colossal headache (and sometimes both)! Consider the pros and cons before adding a duplex to your real estate portfolio.
The Pros and Cons to Buying a Duplex

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Purchasing a duplex—also known as a two-family house—or a multi-family property can be a smart money-making move as a real estate investment or as an owner-occupied home that will pay you back. But there are challenges as well as rewards specific to owning these types of properties. Read on for must-know info to help ensure that your big buy will be a slam dunk—and not a string of surprises.

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PRO: Welcome to a world of tax deductions.

Thinking about replacing your tenants’ lighting fixture with a ceiling fan? Deduction! Porch railing needs to be replaced? Deduction! For the most part, any repair or improvement to your tenants’ spaces will qualify as a tax write-off. If your home is owner-occupied, work done to common spaces can typically be written off at 50 percent, but most deductions don’t apply to your personal living area. Write-offs are a great way to get money back for improving your property, but be sure to carefully research what qualifies as a deduction with the IRS.

CON: You now own a small business.

With revenue comes processes and paperwork—and it starts the first day you show your new apartment. From rental applications to lease agreements, everything needs to be documented. Tax time holds its own challenges, as you’ll need to file a profit-and-loss statement and account for all of your deductions with categorized receipts. An experienced accountant will be your best friend, but you can review tax forms common to rental properties here.

The Pros and Cons to Buying a Duplex

PRO: Access multi-family financing options.

There are many lending products out there specific to multi-family dwellings. For instance, if you’re buying a duplex that is owner-occupied, a Federal Housing Administration (FHA) mortgage could be a great choice, thanks to competitive interest rates and lower down payments. FHA loans are also generally more forgiving of lower credit scores. However, be aware that FHA requires that you live on the property for at least a year.

CON: You’re a landlord!

From property damage to noise complaints, it’s all on you. Hiring a property management firm may relieve much of your stress, but it will also cut into your profit. Your best defense against problem tenants is a rigorous screening process for all prospects, including a request for a Criminal Offender Record Information (CORI) and credit check. Both can be obtained through tenant screening services, available online. For access to best practices in your state, find a landlord training course near you. They are generally offered through local housing agencies at a relatively low cost.

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PRO: More housing flexibility down the road.

Today’s rental property can become tomorrow’s mother-in-law apartment—or you may want to eventually restore your multi-family home to its original single-family status as a retirement home for yourself. In either case, consider the future housing options a duplex may hold, in addition to the short-term return.

CON: It’s your property—and your liability.

Opening a duplex to tenants can also open up a world of liability. From lead paint abatement to ice on your tenants’ front steps, you can be legally accountable for any personal injury on your property, as well as a host of other infractions. Be sure to research the laws regarding tenant rights in your state and work closely with your home insurance company to make sure your coverage is adequate.

The Pros and Cons of Buying a Duplex

PRO: Your tenants will pay for your investment.

A multi-family property is an investment—and rental income can help you pay for it! Crunch the numbers and decide if the revenue you receive will allow you to make extra payments on your mortgage and pay it down early, or if you’re going to turn a profit that you can use as personal income. Click here for a primer on how to evaluate your return on investment before buying a duplex.

CON: The dreaded “E” word.

Despite your best references and credit check efforts, you may wind up with a tenant who cannot make the rent or seriously damages property—and decide on eviction as your last resort course of action. Unfortunately, evicting a tenant can be time-consuming, expensive, and emotionally draining, and the laws governing how you must go about it as a landlord vary from state to state. Be sure to research the proper eviction process in your state well before this worst-case scenario becomes necessary. Contacting a local housing authority is a good place to start.