Is Buying a Duplex a Good Investment Strategy?

Derek and Michelle have reached a huge milestone: they’re about to become first-time grandparents! But now that all of their kids have grown up and started families back East, they’re a thousand miles away and want to move closer. There’s also Derek’s mother to consider. She’s a widow now and needs care. So Derek and Michelle have cooked up a novel idea: why not sell their house and his mom’s, then consolidate into a duplex closer to their children and grandchildren? Once his mother passes, they can take in tenants and draw rental income when they retire. But they’ve never owned a duplex before. Is this a good strategy, not just for their immediate need, but as an investment?

What is a Duplex?

A duplex is a residential property divided into two separate apartments in the same building. Sometimes they’re built that way, like townhomes, while other times a single-family home has been split into two separate units. They can be side-by-side or one upstairs and the other downstairs. They often have separate entrances, but in some cases there may be a shared front door to a foyer that splits off into two apartment doors.

A House Hack?

One of the great advantages of owning a duplex is that you can live in one and rent out the other. The rent could be high enough to cover the mortgage payments or property maintenance, significantly reducing your housing costs. A young family could take this approach to help them accumulate capital to purchase a single-family home later, if that’s what they wanted. However, the potential income depends on the home’s location, condition, and market demand. All this is great in a high-rent area. Otherwise, the house might not appreciate in value or provide enough rent to justify maintenance and repair. 

Double Perks

One reason a duplex is a great investment is that you can double-dip in tax breaks. 

As long as you live in one of the units, you can get an FHA or VA loan to buy up to a 4-unit property with a low downpayment. You can even use the projected rental income from the rented units to help you qualify for a loan for a more expensive property. You can deduct mortgage interest and property taxes from your taxes.

For the unit(s) of the building that are rented out to tenants, you can deduct depreciation, maintenance and repairs, utilities, and other rental-related expenses because that part of your property is a business for you. If you move out and rent out all the units, then these benefits will apply to the whole building.

Distressed Neighborhoods

In some cities you’ll find a lot of duplexes in neighborhoods that are more run-down and with distressed school districts. While for Derek and Michelle with no kids at home, this doesn’t necessarily bother them, these neighborhoods also tend to have higher crime rates, which could be a problem.

Evictions

When buying a duplex where the units are already rented out, you can’t just evict tenants who have signed a lease and move in yourself. You can do a “cash for keys” deal where you pay the tenant to leave early, but if they refuse, you’re obligated to respect the lease and let them stay until it expires. 

Landlord Woes

Owning a duplex can double some maintenance issues. Now you’ll have two kitchens and twice as many bathrooms to maintain, repair, or upgrade. You’ll have the problems that go with being a landlord: finding and retaining good tenants, vacancies, the legal process of evicting a bad tenant, property damage, etc.

Loss of Privacy

Living next door can also make your home life tense. Dealing with noise complaints and disputes over the use of shared spaces will be more stressful when you’re living next door, sharing a wall, and seeing them every day when you step out of the house. You’ll have to work extra hard to cultivate a positive relationship. The last thing you want is a vibe where you’re waiting for them to leave before you venture outside. 

What Happens When You Sell?

If you sell the duplex, the rental portion is subject to capital gains tax, but the part you live in could qualify for the home sale tax exclusion ($250,000 if filing singly; $500,000 for married couples). Duplexes may appreciate at a slower rate than single-family homes, and resale options might be more limited. Buying near a college or military base where there is a steady long-term demand for housing can be a strategy to make sure you don’t get stuck with vacant units or a property that doesn’t appreciate in value.

Is a Duplex the Right Choice?

Whether a duplex is the right choice for you depends on your own goals and circumstances. For Derek and Michelle, it could work if they can find a unit with a ground-floor apartment for Derek’s mother, with no stairs and handicapped accessibility for her latter years. They’ll need it to be in a neighborhood that is reasonably safe but within the modest budget they will live on in retirement. And, if it already has tenants, they’ll have to figure out whether they can afford to pay them enough to leave, or will have to wait out their leases. Fortunately, the city where they move has a range of neighborhoods of different income levels and many duplexes available. The right one is out there for them; they just have to do their homework. 

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