Buying a Duplex: Everything You Need to Know

Real estate investors should consider adding a duplex to their list of potential investments. Buying a duplex can be a great option for personal living, generating rental income, building equity, gaining real estate experience, and enjoying tax benefits. While navigating this type of investment may come with challenges, it offers numerous advantages. Keep the potential in mind for future opportunities, whether it’s purchasing an existing duplex or exploring ways to create your own.

What is a Duplex?

A duplex is a multifamily home made up of two units. Each unit has its own entrance, bedrooms, bathrooms and living spaces. Many duplexes share a common wall, with each unit on either side. However, some may be laid out as one unit stacked on top of the other. The units are completely separate living spaces though, with a shared or partitioned backyard or outdoor space. 

This type of housing is an option between a single-family home and apartment living. The home and layout may give off more of a feeling of a detached home, but the units are still attached to one another by either the side or the floor/ceiling of the dwelling. However, this type of housing is most commonly side-by-side and spread over two floors. The living areas are on the main floor and the bedrooms are on the second floor. These two units also share a single lot.

Some buildings are made specifically to be duplexes for real estate investments. Others were once single-family homes converted by homeowners or contractors to become a multi-family opportunity. Duplexes are more common in certain geographic areas and are typically found in suburban areas or on the outskirts of urban areas. Some areas may have duplexes situated with other types of single- or multi-family housing. 

The need for more housing can cause contractors and owners to attempt the conversion of a single-family home to a duplex. However, research the regulations on converting because the second unit must be permitted to avoid legal issues when being used as a rental investment.  

How to Buy an Existing Duplex

Here are the steps you can take to invest in a duplex.

1. Define Your Goals

Determine your purpose for purchasing a duplex. If you plan to live in one unit and rent out the other, you may qualify for better financing options and reduce your own housing costs. If the duplex is strictly an investment, make sure the rental income aligns with your financial goals and provides a good return on investment.

2. Research the Market

Take time to research the local real estate market. Focus on locations with strong rental demand, rising property values, and proximity to desirable amenities such as schools, transportation, and shopping. Additionally, research local rental rates to estimate potential income and ensure it will cover your expenses.

3. Set Your Budget

Establish a clear budget for your duplex purchase. Owner-occupants can benefit from financing options like FHA loans, which require as little as 3.5% down, while investment-only purchases often demand a larger down payment of 20-25%. Don’t forget to account for additional costs like maintenance, repairs, property taxes, insurance, and, if needed, property management fees.

4. Secure Financing

Before you start house-hunting, get pre-approved for a mortgage to understand how much you can afford. Explore various loan options, including FHA loans, conventional loans, or VA loans if you qualify. Pre-approval gives you a competitive edge when making an offer and ensures you are financially prepared for the purchase.

5. Find a Duplex

Work with a real estate agent who specializes in multi-family properties to find a suitable duplex. Ensure the property is inspected by a professional to uncover any structural or maintenance issues that could affect its value or livability.

6. Analyze the Numbers

Run the numbers to determine if the duplex will be a profitable investment. Consider whether the rental income will generate positive cash flow after covering all expenses. Evaluate the capitalization rate (cap rate) by dividing the net operating income by the property value to assess the property's overall profitability.

7. Make an Offer

Collaborate with your real estate agent to submit a competitive offer within your budget. Ensure your offer includes contingencies for financing, inspection, and appraisal to protect your interests and provide flexibility if unexpected issues arise.

8. Close the Deal

Once your offer is accepted, carefully review all closing documents with the help of your lender, agent, and attorney (if applicable). Finalize your financing and complete any necessary payments to officially take ownership of the property.

9. Prepare for Tenants

If the duplex requires updates, complete any renovations to make it appealing to renters. Draft legally compliant lease agreements that clearly outline the terms for tenants. Decide whether you will manage the property yourself or hire a property manager to handle tenant relations and maintenance.

10. Monitor and Maintain

Stay proactive with the management and maintenance of your duplex. Regularly inspect the property, address tenant concerns, and handle repairs promptly. Keep detailed records of your income and expenses for tax purposes and to monitor the long-term performance of your investment.

How to Create a Duplex

When looking for great real estate investment opportunities, keep in mind the potential of creating a duplex. You can buy a house and split it into two functioning units. A conversion like that allows you to invest in multiple properties while also increasing housing in the area. 

Many markets currently have a major demand for housing. Creating a duplex can offer a more affordable way for multiple families to get into a town — or allow for you to get in and earn rental income that can be used towards your own mortgage payment. 

While there may be some concern about breaking up historic homes or cookie-cutter homes in certain areas, many areas welcome the extra housing and extra residents to the community. You can double the housing availability by creating a duplex. 

Advantages of Buying a Duplex

Buying a duplex offers many advantages:

• You can live in the duplex: You live on one side, and you rent out the other to a tenant. You stay in control of your investment and be your own property manager —  from the inside out. If the A/C or heat needs maintenance, you’re the first to know. Is a new roof needed? It covers your home too. Paying for lawn care? You get to enjoy it too. Take the income from your rental investment and put it right towards your own mortgage, while you enjoy the perks of living right in your investment property. 

• Rent adds income to your budget: Maybe you thought that purchasing a duplex was out of your price range. The rental potential added from the second unit can be factored in to help you qualify for the purchase. As long as you have a reasonable idea of the rental income potential, and you have an adequate down payment (at least 25%), you may be ready for a great real estate investment. 

• Investment properties tend to rise in value: Buying real estate is one of the best-known ways to build wealth. Keep your investment maintained and rented out and you could see an impressive long-term appreciation.

• You can save dilapidated properties: Not only would buying and renovating dilapidated properties look good for the town, but you would also be helping the overall real estate market in that town — including your own investment. Even better — you can usually score a run-down property at a cheaper price. Turning it into a duplex will double the rental potential, or give you a new home with a much lower mortgage payment after the rental income is applied.

• It’s much less complicated than an apartment: One of the best things about a duplex is that it involves one owner. If you own an apartment, you are still under the rules and terms of whoever owns the overall building. A duplex also allows you to be dealing with one set of neighbors instead of multiple neighbors. Keeping things simple with just one neighbor in close proximity and just one owner can save you from a lot of issues that may arise in an apartment setting.

Drawbacks of Buying a Duplex

Most real estate investments come with a few drawbacks, and a duplex is no exception. Keep these in mind when deciding whether to pursue a duplex investment. 

• Firewall: Apartment buildings use these to prevent the spread of fire. You might consider installing one between the two units, or it might be required by the local building code. This renovation can get pricey and is worth factoring in. 

• Renting is complicated: Make sure you rent properly. All building codes, permits and insurance must be up to date and meet regulations. You can’t just rent however you see fit — you need to comply with specific guidelines and regulations to successfully rent out a unit in a duplex. In addition, renting out one side and living in the other can present its own set of complications. You may end up with needy or annoying renters who clearly know where you live and can bother you at any time. They can also be loud and disrespectful, which you now have to live with. 

• If you move out, you have to rent: While you can make rental income from the duplex — which is nice — it’s twice as much work renting to two rental clients. If you only have experience with renting out one side of your duplex, it’s an extra effort now to have two tenants in a building that you no longer live in. Finding the right tenants and keeping up with the property management and maintenance on the property is more work once you move out. 

Alternatives to Buying a Duplex

A duplex can be a great way to get into real estate investing, but it can require a considerable amount of capital to get started along with a significant amount of work. Real estate crowdfunding provides investors with another option to take advantage of the cash flow and growth potential real estate can provide, but with much less capital and no management headaches. Here is our list of some of the top crowdfunding platforms to use as an alternative to buying a duplex.

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