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:
What Is a Duplex?
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.
Should I Rent in a Duplex?
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.
Why Buy a Duplex?
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.
How Can I Profit From My Duplex?
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.
How Do I Rent Out a Duplex?
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.
Should I Sell My Duplex?
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.
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