Special offer

Duplexes as an Investment Strategy

By
Real Estate Agent with RE/MAX Bryan-College Station TREC# 499368

I get phone calls on a weekly basis from potential clients interested in buying duplexes.  Many of these potential clients have the thought that they will buy a duplex and rent out one side while living in the other. Not a bad strategy.  However, many of these people have the idea that the one rental side will cover the payment and they will be living for free.  Great idea, but usually not practical. 

Good return on these units, and what I use to pass the viability test is about 1% of purchase price per month.  I currently have a duplex on Westcreek available.  It's an awesome 2 bedroom/1.5 bath duplex with a fireplace and a nice sized yard.  It is listed at $129,900.  Monthly rental on one side is $650 and the other side (which has been occupied for the past 10 years with this tenant) is a more modest $550.  Total income is $1200/month.  This passes my test because the one tenant pays lower rent because he has lived there so long.  Say he decides to move out and you purchase the duplex and put 10% down, or $12,900.  You are financing $117K for 30 years.  We'll say the interest rate is 6.5%.  Your interest for the first year would be $7605 approximately.  Insurance on the building will be likely to run you around $600 per year.  Taxes will be approximately $3000 for the year.  Your costs, without maintenance, shared utilities and principal added in are approximately $11,200.  Your income is $7800.  This leaves a shortfall of $3400 or a little less than $300 a month. 

Older duplexes like this can have some up potential.  Looking at several of the newer duplexes the numbers paint a much worse picture.  A 230K duplex (new, or like new, 3 bed/2 bath) will rent out for approximately $1000 per side.  Obviously you can't carry a 207K note for $1000 a month or even expect that you would have to pay less than the $1000 that the other side is paying.

The upside to this is that the duplexes will have increased value after your stay most likely, but don't expect a free ride...

Posted by

Chris Tesch

RE/MAX Bryan-College Station

Peggy Edwards
Future Home Realty - Westchase, FL
REALTOR - Green Designation, e-PRO, Tampa Bay, FL
Chris, interesting.  You write so clearly so that even newbies get it.  Thanks.
Jun 29, 2007 03:18 PM
Thesa Chambers
West + Main - Bend, OR
Principal Broker - Licensed in Oregon
Chris - it always amazes me when people think a rental will pencil out when they put little to nothing down.  The value is obtained when they receive the tax benefits, the depreciation and the appreciation.... it is often very confusing to the average buyer.  I do not have to deal with the duplex issue often but I do have the same with buying a vacation rental
Jun 29, 2007 06:15 PM
Chris Tesch
RE/MAX Bryan-College Station - College Station, TX
College Station, Texas Real Estate

Peggy, Thanks!  I've had lots of experience in explaining this issue!

Thesa, That is the key.  If they are putting quite a bit down it would work well.  The tax benefits and depreciation will help, but expecting a free ride for a modest downpayment won't work.

Jun 30, 2007 01:24 AM
Anonymous
Joe, a duplex investor

I get it Chris, but you framed the question in a ridiculous and unrealistic way. Reframing the question: "By investing in a duplex, can I significantly reduce my month to month living cost?" By your own example, it would cost me $300 a month to live in one side of the duplex. If it would cost me $1000 to rent, I save $700 a month from owning a duplex. Assuming little to no maintenance cost and no vacancies, it would take less than two years to get back my down payment from reduced living expenses in the duplex. Investing in a duplex as a first time homebuyer is an excellent way to enter the housing market and provides much more options to the owner.

Feb 11, 2015 07:29 PM
#4