Are you dreaming of one day buying your very own duplex?
Chances are, probably not.
Truth is, duplexes and small multifamily homes are often overlooked opportunities. And, for many first-time buyers, duplexes can really pay off in future dividends. More and more homebuyers are finding that investing in a duplex allows them to buy bigger properties, live in better neighborhoods and build future wealth.
That said, duplexes aren’t for everyone.
Read on and find out if owning a duplex makes sense for you and your family.
What is a duplex?
A duplex is simply what the name implies, a single lot designed for two households. Duplexes are usually a single structure that share a common wall or separated into two stories. Occasionally, you might find two standalone homes on a single lot called, naturally, two-on-a-lot.
Most everything we discuss here also applies to triplexes and fourplexes. To keep things simple, we’ll limit the discussion to duplexes.
Whether a duplex or fourplex, the one thing that small multifamily properties have in common is affordability and efficiency. Because land is the single most expensive part of a property, combining more units on any lot reduces the cost.
The good news about Los Angeles is that duplexes are quite common here. In many cities, multifamily housing is only allowed in certain parts of town. In Los Angeles, you’ll find duplexes in just about every neighborhood and in many architectural styles and price ranges.
What savvy homebuyers know about duplexes
Although duplexes can make profitable investments as pure rentals, most prospective duplex buyers look for properties where they live in one unit and rent out the other.
Clearly, it’s the added income that makes multifamily investments appealing.
As mentioned above, duplexes are generally more efficient than single family homes because they combine two households on a single lot. This means that the cost of the land is spread out over two homes instead of one.
The key benefit is that the extra unit provides income to the owner. The monthly rent not only helps pay down the mortgage but it can also be applied towards the qualifying income which helps secure even larger mortgages. This is a powerful way to leverage into buying a bigger property or live in a more desirable neighborhood.
For homebuyers with school-age children, buying a duplex can be a excellent way to live in a great school district that might otherwise be financially out of reach.
As an additional benefit, duplex owners can take advantage of special income tax rules, just like any other property investor. Duplex owners are usually allowed to deduct expenses and depreciation from their income which can lower their tax bill. Keep in mind that every situation is different so you should consult with your tax adviser first to find out how you might benefit from owning income property.
How duplexes work: A real life case study
Here’s an actual duplex currently on the market in Los Feliz.
This is large, luxurious two-story building. Each unit has three bedrooms and two bathrooms with around 2,400 square feet of living space for each unit. The owner lives on one floor and rents out the other for $4,500 per month.
It is offered at $1,840,000.
Here’s how it works.
Let’s say that you buy the property at the list price and with a 20% down payment. This would mean the mortgage cost would be approximately $7,240 per month. After deducting the $4,500 rental income, the out-of-pocket expense of the mortgage payment is about $2,740 per month.
To put this into perspective, that $2,740 is the same as you would pay for a $700,000 property with a 20% down payment.
Because of the the rental income, you’ve effectively doubled your buying power. You would own a $1.8 million for the same cost as a $700,000 single family home. And that’s before considering the tax benefits which could lower the costs even more.
Of course, this assumes you have an adequate down payment and can qualify for the higher-priced property. But the principle is the same. And it works for lower-price properties just as well as higher-priced homes.
Four good reasons to avoid duplexes
- No way around it. If you live in a duplex you will, to some extent, share the property with the tenant. For some, this may be the deal breaker.
- Having a tenant also means that you will have to take on landlord duties. You will either have to hire someone to perform repairs and maintenance, or do them yourself. While maintaining a small multifamily may not take much more effort than a single family home, it is something to consider.
- As a landlord, you will be responsible for finding and screening tenants. Again, you can choose to do this yourself, or hire a professional to do it for you. Also, if the property is in Los Angeles or West Hollywood, then it will likely fall under rent stabilization ordinances. This means you need to be familiar with these rules before you take on tenants.
- And lastly, owning rental property will require you to keep good records and may make your tax preparation a bit more complicated.
Still interested in exploring owning a duplex?
The next step is to learn how to buy right. There’s a saying in real estate that all the money is made at the time you buy. This means that it’s important to learn how to spot a good deal. In future installments, I’ll show you a few quick and easy ways to separate the winners from the rest.
In the meantime, happy house hunting!