One big reason to make a duplex your first home


Reader Question: What are the differences between a one family home and a two family home? We are first time homebuyers and know zero about real estate. We prefer not to involve our families, as we want our successes and failures in life to be our own. Shaun and Josey B.

Monty’s Answer: Many of the differences are obvious so let us focus on the differences that are not so obvious. Full disclosure: The writer’s first two homes were duplexes. The economic benefit of a duplex over a single-family home was our principal motivation.

To demonstrate the financial advantages of a duplex compared to a single-family home, this example of two similar homes – one duplex, the other single-family – will help. The neighborhood, livable square footage, age, and more are comparable. The price of the duplex is $15,000 more. An additional $3,000 down payment will be necessary. Both duplex apartments are nearly identical units with a one-stall garage for each unit. The single-family has a two-stall garage.

There are different price points for homes with these characteristics. The values will be higher or lower in many markets, and the rents, real estate taxes, and mortgage payments must be adjusted accordingly, but the basic concept should be intact. You will pay less out-of-pocket, often far less, owning a duplex.

Assume a 20 percent down payment, a thirty year fixed rate mortgage at 3.5% interest with total closing costs built into the loan. Closing costs of $1500 on the house and $1800 on the duplex. Lower down payments are available on both properties, but there will be higher loan costs.

  • The single-family home – Purchase price of $134,900 with a mortgage of $107,920 plus $1500 equals $109,420 total loan. Down payment is $26,980. Monthly payment is $489.92 plus $227 real estate tax and insurance, another $66, for a total monthly payment of $782.92.
  • The duplex – Purchase price of $149,900 with a mortgage of $119,920 plus $1800 equals $121,720 total loan. Down payment is $29,980. Monthly payment is $544.99 plus $367 real estate tax and insurance of $75, for a total monthly payment of $986.99. Here is where the economic difference begins; rental income generated by the second unit in the duplex is $850, so your out-of-pocket payment is $136.99.

The economic benefit does not end here

Our tax code wisely recognizes that property depreciates and requires repairs, maintenance, and replacement. A section of the tax code allows a rental property owner a depreciation deduction on the rental side. The deduction encourages rental property owners to maintain and improve their property to the benefit of the owner, the tenants and the greater community. To learn more about depreciation here is a link to the IRS Brochure 527 that discusses allowable deductions in detail.

Here is another potential bonus

Assume a duplex property owner plans to save the difference in out-of-pocket payments between the single family home and the duplex. They would save about $650 per month or $7,800 in a year. In less than four years they would save enough cash for a down payment on another $150,000 duplex. When they buy duplex number two and move out of duplex number one, their mortgage payment on their first duplex remains about $986. They rent out the side they formerly occupied for $850, and now they are generating over $700 per month from duplex one. This cycle can often be repeated.

This duplex thing sounds easy

For decades, many books have been written and classes offered teaching interested students how to build a successful real estate portfolio. The result is that even if a potential investor learns what appears to be simple, many are not successful. This fact is the other not-so-obvious step in the equation.

So what is the answer? Can you do it? The first step is to look inward. What do you like to do in your spare time? Might your full-time job compliment or hinder what is required to own rental property? Are you handy? Are your people skills strong? Do you display good common sense in other areas of your life? Are both of you committed to an income property? Here is an article about what it takes to be a good landlord that may be helpful. Here is another article about selecting neighborhoods that also offers tidbits you will find insightful.