A duplex is usually defined as a building that has two separate dwellings, sharing a wall, floor, or ceiling, and each having a separate entrance. They can be side by side, or one unit on top of the other. Duplexes, also referred to as two-family dwellings, may have been built specifically or converted from a one-family home. They differ from what is referred to as an in-law apartment in that duplexes are zoned specifically as a rental, have separate entrances, and do not violate any local ordinances.
Buying a duplex and renting out one half certainly makes sense for perspective homebuyers on a budget. In theory, income from your tenants should pay a big portion of your mortgage payment. It is often easier to qualify for a mortgage on a duplex or two-family, since potential rent is considered as income. Additionally, there are significant tax advantages to owning a duplex, in that all repairs to the unit are usually tax deductible, even those impacting both units. There are certainly advantages to this arrangement, but there are also some negatives. Here’s a rundown on some things you should consider.
Before you start looking at property, it is critical to calculate exactly how much money you are able to spend. There is no point in looking at houses that are beyond your budget, and, once you establish your maximum dollar amount, you will be able to look only at houses that fit your those parameters. There are a number of websites that allow you to calculate a monthly payment based on various interest rates. Make sure that you will be able to manage the monthly payment on your own. Never calculate the rent income as part of your maximum price, because there may be times when you have no tenants and, as a result, no income.
Once you have determined how much you can spend, you can start looking at houses. It is important to carefully inspect both units, since, as the landlord, you will be responsible to repair any defects in both your own residence and your rental. Check the electrical system (including circuit breaker box), plumbing, foundation, roof, windows, floor, furnaces, water heaters, appliances, and other amenities. Certainly, your purchase offer will cover the repair of obvious defects, but there are other items that are considered “as is.” Replacing appliances, heating systems and other amenities can make a big dent in your rental income. When considering rental property, remember that a tenant expects and deserves immediate attention when there is a problem. There are usually repairs that you, as the owner can live with in your own unit, but that must be fixed for the tenant. It is important to have a cash reserve on hand to cover unexpected expenses.
In many cases, tenants already occupy one or both of the units in a duplex. If both units are occupied, obviously, you are going to have to ask one of the tenants to leave in order to open up a unit in which you can live. This can be very sensitive, especially if the tenants have been living in the apartments for extended periods. If possible, talk to the current owner and ask about the present tenants in both units. Do they pay on time? Are they overly picky as to repairs? Have they taken care of their apartments? Certainly, the tenants are aware that the building is being sold, and are probably nervous about the prospects of a new landlord and of having to move. Remember that you will be establishing a relationship with one of these tenants and it is important to start off on the right foot.
When duplexes are sold, it is often customary to include considerations for an existing tenant. In some cases, the rent may be maintained or an existing lease extended. Of course, if the terms are not agreeable or realistic, you will need to negotiate with the seller as part of the closing process. For example, a tenant may have lived in the unit for many years and the rent may not reflect current standards. You may not be able to afford to hold the rent for this tenant and, in fairness, that person should be advised as to changes that may occur when you take occupancy. You can, of course, allow the individual to stay through the end of his or her lease and then renegotiate on expiration.
If the units are vacant, it is certainly easier to establish landlord/tenant relations with a new tenant, but you do not have the benefit of “instant” income. You cannot advertise the unit for rent until you close on the property, and even after you find a tenant, there is usually a delay until the tenant can move in. In the meantime, you are financially responsible for the entire mortgage payment and may also need to do cosmetic or other repairs on the rental unit. A word of caution – do not spend the tenant’s security deposit on upfront repairs. In many states, this money must be kept in an interest bearing account and returned to the tenant with interest when they move from the apartment. Of course, if there has been damage to the apartment, the security deposit can be used to cover those expenses, but the tenant must be furnished with an itemized listing of the expenses, including labor costs. Sometimes, tenants will leave an apartment without paying the last month’s rent and, in those cases, the security deposit can be used to cover the rent. But, you lose out if damages are incurred.
Be sure to cover yourself legally by requiring that your tenant sign a lease. There are standard forms available online and in office supply stores, but the best way to protect your interests is to consult with an attorney. Perhaps the lawyer who handles your real estate transaction can also provide some guidance in this area. A typical lease will include monthly rent, due date, late fee considerations, terms of the security deposit, and your expectations of the tenants. You may also spell out what types of appliances the tenant can move into the apartment, specific use considerations, and other stipulations unique to your building. An attorney will help you to anticipate unexpected occurrences as well and look for possible loopholes. Anything that is not spelled out in the lease can, and often is, used by a disgruntled tenant in the event of a dispute.
You should also ask your attorney to spell out local tenants’ rights ordinances. In many areas, tenants are entitled to reimbursements for expenses incurred when they are unable to live in the apartment due to required repairs, etc. These stipulations should also be addressed in the lease. You should also require that your tenants purchase renters’ insurance. This will protect you from lawsuits in the event of a fire or other catastrophic event.
Remember, no matter how good a tenant may appear “on paper,” there is always the chance that he or she may be disappointing. Laws restricting obtaining certain sensitive information are restrictive and, certainly, a tenant may be withholding information. It may be a wise business decision to use a rental agency, especially one that ensures quality candidates. Be cautious when dealing with friends or family members as well.
Treat your real estate as a business. Keep good records of expenses incurred, and, if possible, save some of the rental income in a separate account. This will enable you to have adequate resources if repairs become necessary. You can also use this money in the future as part of a down payment on another property.
Your first duplex can become the foundation of your own real estate venture, allowing you to invest in additional properties. Income from these properties may enable you to retire early or to stay at home to raise children. Real estate has been one of the few investments that have consistently appreciated and, in some areas, the return on investment can be significant. Is buying and leasing a duplex right for you? Certainly, the advantages outweigh the disadvantages, but each person’s situation differs. It is, however, something worth considering.
