You like the idea of owning a home, but you feel you may be missing out on an opportunity to earn money at the same time. If only there were a way to live on property you own but also take on renters who live separately.
You may be able to get everything you want with a duplex.
Here’s what you need to know about how duplexes work, what it takes to profit from a duplex and when selling a duplex is a good idea:
A duplex home is a small type of multifamily building with two connected dwellings that have separate entrances on a single property. Each dwelling is considered a duplex apartment. Often, a duplex looks like a house with two front doors, either split between floors (with one apartment upstairs, and the other downstairs), or split down the middle of the building.
Other small-scale apartment buildings include triplexes and quadplexes (sometimes called fourplexes), which have three and four apartments, respectively, and are similarly connected like a duplex.
In major cities where large condo or cooperative communities are common, a duplex may be defined as a two-floor apartment within a larger building. However, this is a less common definition of a duplex and often only found in large buildings in cities like New York or Chicago.
As a renter, where you choose to live is often based on location, budget, condition of the property and preferences and needs, like the number of bedrooms or whether a rental is pet-friendly. Depending on your experience renting, you may prefer working with an individual landlord or a property manager who works with many renters.
When renting a duplex, you’ll likely deal directly with the property owner, and the owner may even live in the other unit on the property. According to the U.S. Census Bureau’s 2018 Rental Housing Finance Survey, the results of which were released in May, about 79% of duplexes, triplexes and quadplexes in the U.S. are managed by the property owner or an unpaid agent of the property owner, like a relative.
Renting in a duplex may also offer different location options than a larger apartment building. While some new duplexes are being constructed, you’re more likely to find them in residential neighborhoods where most properties were constructed at least 60 years ago, and it’s unlikely you’ll spot them in a downtown location.
Duplexes are common in more sprawling cities and neighborhoods where single-family housing is the norm but many residents are renters. Many parts of the greater Los Angeles area are prime examples, with “a lot of single-family (housing), and you see a lot of the fourplexes (and) duplexes as well – it’s a mix,” says Simon Aftalion, development director for Markwood, a real estate investment, development and management firm based in Beverly Hills, California.
If you’re inclined to start small in real estate investment, buying a duplex can be an effective starting point.
The upside to investing in a duplex is that there are two living spaces: one to rent out, and one to live in if you choose. “Right now, the vast majority of my business is owner-occupants,” says Kari Lundin, a Realtor specializing in the purchase and sale of duplexes with Keller Williams Realty Integrity Edina in Edina, Minnesota, and creator of DuplexChick.com, an information source on duplex investment. She adds that most people who buy duplexes intend to put a little work into the second unit before finding a tenant.
As long as you take a careful look at your financial situation before buying and calculate expected cash flow, your duplex will hopefully be a profitable investment. As with many other types of investments, however, you likely won’t see much profit in the first few years of ownership – your ability to build equity over time is a key to success.
Often, aspiring real estate investors see a duplex as a first step to building a real estate portfolio. With just a duplex, however, don’t expect to see significant profit coming from monthly rent.
“If you live there, you’re not going to get paid to live there,” Lundin says. “Most will save anywhere from $300 to $600 in their (previous) rent per month by buying a duplex.”
The benefit to a long-term investment like a duplex, however, is that you can build equity and have the power to make changes. "No matter what the market is, if my property's not renting, I can change it ... paint it, lower the rent or anything to bring a tenant in," Lundin says.
Even if you have to ride out tough economic times, your equity in the property will build, and the rent tenants will pay often grows as well. When you eventually sell the property years down the road, you'll hopefully see a sizable profit.
Before you lease to a tenant, be sure the property is in good, livable condition. Windows must open, the exterior doors must lock, the heat and air conditioning should be functioning and the plumbing and electrical systems should work well.
Many small-scale landlords choose to hire property management companies to oversee renting and maintenance, while others choose to handle everything themselves. Take high-quality photos and write a succinct description of the space to list on sites such as Apartments.com, Zillow, Rent.com and even Craigslist. Be ready to field requests to tour the space.
To draw up a lease agreement, you can take advantage of online templates through companies such as Rocket Lawyer, eForms.com and LawDepot. Be sure to read up on and include any details specific to landlord-tenant laws in your state. You may also want to hire an attorney to help you draw up a comprehensive lease contract that you can use from year to year.
If you own a duplex and are wondering whether now is a good time to sell, it depends on your situation.
If you’ve built up equity in the property and feel confident you can make a sound profit from the sale, putting it on the market could be the right move. Especially if you can provide records of strong cash flow, other investors would likely be interested in the deal.
Decide if you would take your profits from the sale to invest in real estate again – maybe in a property with more units – or simply use the cash in a different way.
If you’re struggling to make ends meet with your duplex, selling now may be the better alternative to facing foreclosure down the line. Speak with a financial advisor and a local real estate agent who can help you time your divestment right.
These missteps can cost real estate investors returns.
Owning property, either directly or indirectly, can add diversity to a portfolio and yield value to investors on several levels. “Real estate is a tangible asset with inherent value unlike many other investment vehicles such as stocks, which many consider as gambling,” says Adam Kaufman, co-founder and managing director of ArborCrowd. Tax benefits, enhanced transparency and the potential to hedge against stock market volatility add to its appeal. Avoiding these common mistakes is key to managing real estate successfully in a portfolio.Buying without researching.
Buying without researching.
Rushing into real estate without understanding what you’re getting can lead to bad results, says Kyle Whipple, a financial advisor and registered investment at advisor at C. Curtis Financial Group in Plymouth, Michigan. “Just because real estate is doing well doesn’t mean it will turn out to be a good investment for you.” Stock investors are often told to “buy low, sell high” and that same rule can be put to use for property investments. “You want to make sure that you’re getting a good deal and not purchasing an overpriced piece of real estate which will lower your long-term returns,” Whipple says.Developing a tunnel vision.
Developing a tunnel vision.
Real estate adds a new dimension to a portfolio, in terms of balancing against the risk and volatility associated with stocks. Kaufman says a common mistake is being too narrow about property focus. “Many individuals fail to diversify their real estate holdings,” he says, investing only in one local geographic area or property type. “This all-eggs-in-one-basket approach drastically increases downside risk, but investors do this because they are more comfortable investing in markets they’re familiar with.” Casting the net wider to incorporate crowdfunded investments or real estate investment trusts, known as REITs, can offer exposure to a broader group of properties and increase diversification.Going it alone.
Going it alone.
(Petar Chernaev/Getty Images)
Owning a commercial or residential rental property can be both time- and capital-intensive. Trying to handle it all solo can require a level of focus and commitment that may not be realistic for every investor. A simple way to avoid that mistake is building a team from day one, says Kevin Ortner, president and CEO of Renters Warehouse in Minneapolis. That may involve investing with a partner or working with a broader group of individuals that includes an experienced real estate agent, an attorney who’s well-versed in property law, professional contractors and a property management company. Having support can make investing in real estate a smoother experience, with less room for error.Relying on bad advice.
Relying on bad advice.
When seeking out help in making decisions regarding property investments it’s important to go to the right sources. “Making an investment in real estate, especially for first-time investors, can be daunting and nerve-wracking,” says Rowena Dasgupta, an agent at Warburg Realty in New York. “Often, people ask friends and family for their opinion more for reassurance than for legitimate guidance.” What they should be doing instead, Dasgupta says, is seeking counsel from real estate professionals or an investor with a lengthy track record of buying and selling properties. These individuals have the knowledge and experience to provide more reliable advice.Assuming it’s easy.
Assuming it’s easy.
Just like stocks, mutual funds, bonds or other investments, real estate requires a certain amount of know-how to navigate. Terrell Gates, founder and CEO of Virtus Real Estate Capital, says both large and small real estate investors can make the mistake of thinking that investing in property is easier than it is. This can be exacerbated in bull markets when real estate is going strong because people tend to forget about previous downturns. “Unfortunately, to be consistently successful in real estate over the long haul requires more skill than luck,” Gates says.Chasing bargains.
Ortner says another common pitfall among real estate investors is only looking for a deal when buying a property. “If you’re going to make long-term real estate investments, you don’t need to buy at a major discount,” Ortner says. “You just need to do deals that make sense, because, over time, you’re going to be building equity.” He says many investors limit the properties they can buy because they’re hoping to land a major discount with value, which isn’t a realistic target in the current market environment. By maintaining a long-term outlook, investors can avoid the bargain hunter mentality and focus instead on growing their property portfolio.Not having an exit strategy.
Not having an exit strategy.
Real estate can be a good buy-and-hold option but failing to develop an exit strategy can be damaging. Whipple has seen this scenario play out firsthand, with investors selling a highly appreciated piece of property without a plan in place for what to do with the funds. “They feel they are done with the real estate game and want out,” he says. “Unfortunately, they end up getting hit with a lot of taxes.” Having an end-play for real estate investments from day one can help avoid costly situations when it’s time to sell.Overlooking the bigger picture.
Overlooking the bigger picture.
The worst mistake with real estate investing may simply be not considering how to utilize it within a broader portfolio. “Many investors make mistakes when they don’t understand how real estate fits into their overall strategy that includes diversification, long-term appreciation, liquidity needs and cash flow,” says Brent Weiss, co-founder and chief evangelist of Facet Wealth. Having a financial plan that incorporates real estate begins with understanding investment goals, risk tolerance and time horizon. These are things a financial advisor can help with. “Once investors understand what strategy will support their plan, they can determine the right mix of asset classes to create success,” Weiss says.The eight mistakes to avoid with real estate investing are:
The eight mistakes to avoid with real estate investing are:
- Buying without researching.
- Developing a tunnel vision.
- Going it alone.
- Relying on bad advice.
- Assuming it’s easy.
- Chasing bargains.
- Not having an exit strategy.
- Overlooking the bigger picture.
She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at email@example.com.