5 Things To Know Before Buying a Duplex
One of the smartest ways to build wealth is by buying real estate (particularly rental properties); just ask Warren Buffett. He was recently quoted as saying he’d buy “a couple hundred thousand single family homes [as an investment]” right now if he could.
Buffett realizes the value that rental properties can bring not just in terms of monthly cash flow but also in appreciation and deductions.
Buying a duplex or multi-family property is a great option for the buyer that wants lower monthly expenses, could use the write offs come tax time, and is comfortable with added responsibility.
1. Buying a multi-family home will limit your location options
If your goal is buying duplex, triplex or quadruplex to live in one part and rent out the other or others, you may be limited in terms of the locations that you’ll get to choose from.
For example, you will have a very difficult time finding a duplex or triplex in La Cañada to purchase. Montrose and Glendale have multi-family properties in many parts of the city, but be prepared to live in the more urban areas. However, if you’re not extremely picky about the neighborhood you live in now, this could be your opportunity to get in and make some good money over time.
2. There’s more to owning a multi-family property than cashing checks
The main benefit of owning a multi-family unit and living in one of the units is rental income. Every month you’ll get a rent check that offsets your mortgage.
One downside? Tax complexity. Just look at all the IRS rules regarding investment properties. Always consult your tax professional (yep, you’re going to need a real professional, not some H&R Block “accountant) prior to making a large investment purchase, especially one that you expect to make depreciations and write-offs from.
Another benefit of buying a duplex or multi-family unit and living in one of the units while renting out the others is that you’ll always be close to your rental properties so that you can check on the condition frequently. If loud music is being played late at night, you’ll be the first to know about it. If a pipe bursts or a toilet is clogged and your tenants need assistance, at least you won’t have to make a long drive in order to fix the situation.
The drawback? You’re close to your tenants, so that loud music bothers you, not somebody else. And if you have a needy tenant, they’ll have easy access to you to voice their complaints.
3. Financing a multi-family home is tricky but doable
Buying a duplex or multi-family unit with your budget may seem impossible, but the reality is it might not be as hard as you think.
According to Anthony Lococo, Vice President of Cornerstone Mortgage, “If buying an owner-occupied duplex, you would definitely be able to use [the potential] rental income from the second unit” to help you qualify for the purchase.
For example, if you will be living in one unit and renting out the second, and you anticipate the second unit to be rented out for $1,200 per month, that income will be factored in to the lender’s qualifying ratios.
How do you know what the second or additional units will rent out for? If you don’t already have a lease in place (which you probably don’t), use your favorite DIGGS agent to help you verify rental prices for similar units. Keep in mind, the potential rental income may help you qualify for the loan, but it’s not the only factor to be considered.
You’ll still need to have good credit, a low debt to income ratio and a large down payment, typically around 25 percent of the purchase price or more. On a $500,000 duplex, you’re looking at a down payment of $125,000, not including your closing costs such as escrow and loan fees
4. Is it a legal duplex?
If you can qualify, lending guidelines for multi-family units are straightforward. One thing that can get in your way is whether the property is legally a multi-family property. If you are purchasing a home with a guest unit (ADU) with the intention to rent that space out, your lender will only consider your rental income if the ADU is legally permitted.
Make sure to do your research on any property you are considering. Your DIGGS agent will be able to help you look up permits, arrange inspections and give you guidance for potential income.
5. What if you want to move out someday?
The time may come when you’re ready to move out and get something bigger. In that case, you may choose to sell the multi-family unit. (Call us!!)
If you don’t absolutely have to sell it in order to qualify to buy the new house, consider getting a tenant in the unit you were living in and keeping the whole thing as a rental. Having already been a landlord for your neighbors, being a landlord for one more family won’t be too much of a shock.
Think you’re ready to take the plunge into owning a duplex? We can help you! Give us a shout in the form below to get started.