The Top 7 Reasons Why Buying A Duplex Is Financial Wizardry

buying a duplex

My second investment property was this duplex in St Louis, Missouri.  It was located in an area of St. Louis with great restaurants, schools, parks and easy access to freeways to get about anywhere you wanted to go.

As I compare my other investment properties to this one, I’ve come to the conclusion that buying a duplex is such a great investment hack.  Here are 7 reasons why:

Buying a Duplex, means having 2 tenants amortize one roof.

Lets face it, replacing a roof is expensive!  I just replaced one on a single family home in February which required 50 bundles of architectural shingles at a total replacement cost of $8500.  The home is 1300 square feet, and because of its unique roof line, this was the best deal I could find.

If you aren’t sure how to calculate how many shingles you need to replace your roof, this site will help.

As a landlord who is typically cognizant of the true return on investment, I find it important to amortize the cost of that roof with the rental income coming in.  In this case, with the $1100 per month rent it brings in, it will take 7.72 months to repay the cost of this new roof.

However, If this were the duplex I previously owned which was bringing in $1800 per month in rental income, and it required a similar roof, it would have paid me back in 4.72 months.

A duplex is a great way to leverage your expenses, even for those of us in our 50’s.

Buying a Duplex is the modern version of ‘Entry Level Home’

Let’s face it, real estate prices have skyrocketed in recent years, and even the latest ‘interest rate hikes’ haven’t brought down home valuations.   Homes may take longer to sell in certain markets, but they’re still selling.

In many markets Entry Level Homes have become unaffordable for the ‘newly married, starting our first job out of school couple’.  In fact, calls entry level homes an ‘Endangered Species”. 

If this is indeed the case, how do buyers afford an entry level home? 

One of the best ways is by buying a duplex.

Duplexes allow you to live in one unit while you rent the other out, and slash that mortgage payment in half!  Duplexes offer a peaceful and often times spacious place to live, sometimes with a yard for Fido, and a garage for all your ‘on-hold’ hobbies.   They also enable you to dip your toe in the investment market.  Not to mention, starting with a duplex over a Single Family Home, may pay dividends in the way of favorable tax advantages.

Buying a Duplex means you still qualify for a Residential Loan

Residential loans call for lower down payments and lower interest rates.

Typically anything under 4 units still qualifies for a residential loan, anything more than a quadplex will demand a commercial loan.

Commercial vs Residential loans

Commercial loans

These are used for bigger properties and typically have a shorter amortization schedule, so its more difficult (though not impossible) to cash-flow the property.

Commercial loans require a larger down-payment, sometimes upwards of 30-35% down is required.  This is because of the amount of Risk the bank is taking is far greater than that of a residential loan.  Commercial loans are considered a ‘business loan’ and require a higher level of underwriting scrutiny.  Some banks even require you to provide a detailed business plan in order to qualify for a commercial loan.

Commercial loans are often required to be paid back between 5-20 years, and the loan to value (LTV) is anywhere between 65%-80%.  The loan to value is the most the bank will lend for a specific project, which means the balance will have to come from the buyer/ group of buyers, or a secondary loan.  

Residential loans 

Can be procured by just using the buyers credit score and payment history, and typically do not require a business plan to illustrate what your intentions are with the purchase. 

Residential loans can qualify for a 30 year amortization schedule which can significantly help with the properties monthly cash flow.

It’s important to note that If the buyer exceeds 10 residential loans, the bank may require a Commercial Loan for the 11th property.

Many Duplexes are located in neighborhoods with lots of Single Family Homes

Why does this matter?  Because let’s face it, the apartment residents have no incentive to keep the appearance of their complex tidy and inviting.  This is typically left up to the landlords who aren’t there everyday.

However, when duplex’s are mixed in with Single Family Homes there seems to be more of a ‘neighborhood feeling’.  So, even if you live in a duplex, that neighbor you share a fence with may own the residence, and be more inclined to associate with you and work together to keep the neighborhood safe and clean.

That ‘neighborhood feeling’ seems to come with a more permanent vibe with less Uhauls and vans constantly moving in and moving out.  It’s generally a better place for kids to walk the streets, it’s better for block parties, and the residence have a more long term approach. 

Buying a Duplex allows you to build equity faster

The next buyer will most likely have an interest in the monthly ‘rent roles’.  If you show that the duplex has been rented for consecutive years, with little to no vacancy, that buyer may be willing to pay more for it, thinking it’s in high demand.

In real estate investing, ‘perception’ is very important, and if the buyer perceives this to be a grade A property they may be willing to spend more.  They would prefer a low hassle property.

When a real estate investor compares multiple properties, and one has a vacancy rate of 2%, and the other of 40%, the seller of the 2% vacancy home gains leverage and can get away with selling at a higher price per square foot.

Owning a Duplex allows you to enter the Short Term Rental Market (STR)

There is typically no HOA or governing body who dictates how you rent your duplex.  You are in control.  So, If you have the stomach for it, you could rent it out on a per night, per weekend, per month, or whatever timeframe you can dream up.  

I was just looking for a VRBO to rent for the Labor Day Weekend in Memphis, and couldn’t find anything suitable.  A duplex would have been perfect.

If you could rent out both sides on a short term basis, I would imagine you would have no shortage or willing tenants.  The amount of revenue which could be generated by renting both units on a short term basis, could likely cover your fees for 6 months.    

The short-term rental market is really maturing.  And, I believe the opportunity to cash-flow a duplex by using it as a short-term rental is still in its infancy, but has exceptional upside value.

Buying a duplex is just, a bit out of the ordinary

Ordinary is boring, stuffy, and just plain well…. ‘Ordinary’.  Why be ordinary?

Why not be the trendsetter?  Why not be the renaissance man or women and show others the depth of your personality by taking the road less traveled?  People who think out of the ordinary and abstractly are typically who make this world a better place.  Imagine if Steve Jobs, Warren Buffett or Mahatma Gandhi were simply, ordinary thinkers.

For one, India would still be under British rule.  But, because Gandhi was a free thinker he made movements happen and created freedom for people across the world.

Be a Mahatma Gandhi, see if buying a duplex makes sense for you!

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