Are Duplexes a Good Investment?

The tax benefits of investing in rental property is another great reason to buy a duplex, as you can write off any expense related to the rental unit.

What is a duplex?

A duplex is a type of multi-family residential building that typically consists of two separate units that share a common wall. These units are often mirror images of each other and can be either side-by-side or stacked on top of one another. Duplexes can be found in both urban and suburban areas and are a popular choice for homeowners looking to invest in rental property or for those who want to live in one unit while renting out the other.

Duplexes can vary in size and design, but they typically have two separate entrances, kitchens, and bathrooms. Some duplexes may also have shared amenities such as a backyard or a garage. The units in a duplex are often identical in layout and design, but they can also be designed with slight variations to suit the needs of different tenants or to create a more distinct aesthetic.

Pro Tip: To imagine what a duplex is, take a look at your typical NYC brownstone (i.e. townhouse). While many are single-family townhomes, many are structured as multi-family duplexes or even triplexes. These will often have a shared main entrance, but separate entrances to each unit on the interior. For example, the ground floor unit might have their apartment door directly adjacent to the entrance foyer, and the upstairs unit will have their entrance at the top of the staircase.

Advantages of investing in a duplex

Being close to your rental property

The biggest advantage of renting out one of the units in a duplex is proximity if you also live in the other unit. As a landlord, you have the convenience of being close to your rental property, making it easy to check on the unit, make repairs, or collect rent.

This can also be beneficial for building a relationship with your tenants, as you can communicate with them more easily and address any concerns they may have. Of course, this can also be a disadvantage which we’ll discuss later if you have a fraught relationship with a problematic tenant.

For new landlords, a duplex can also be a good option as it is less intimidating to manage than a large multi-unit building. You can start with a smaller property and gain experience as a landlord before potentially expanding to larger properties. Additionally, you can also choose to live on the same property with your tenants which makes it easy to monitor and respond quickly to any issues that may arise.

Generate cash flow where you live

One of the main advantages of owning a duplex is the potential for rental income. By renting out one unit, a homeowner can offset the cost of their mortgage and potentially earn a profit. Additionally, duplexes offer a more affordable option for homeowners who want to invest in rental property without the expense of a large multi-unit building.

Furthermore, a duplex can also be a good way to diversify your investment portfolio. Owning a duplex can provide a steady stream of rental income, which can be helpful in case of an economic downturn or job loss. Additionally, in areas where property values are rising, owning a duplex can also be a good way to build equity over time.

Another advantage of duplexes is the potential for shared living arrangements. For example, a family member or a close friend can live in the other unit, providing a sense of community while still maintaining separate living spaces. Additionally, duplexes are a great option for homeowners who want to age in place but want to have the option to rent out the other unit.

Duplexes are easy to finance

Because duplexes are classified as residential properties, they are typically eligible for traditional residential mortgages. This makes it easier for borrowers to secure financing from a variety of institutional lenders which typically offer lower rates.

Furthermore, because duplexes generate rental income, lenders may view it as a more stable investment than a single-family home due to the lower risk of vacancy from having multiple units. Lenders may view this as less risky than lending to someone who owns a multi-unit building where all the units might be vacant at the same time.

A duplex can be used as a primary residence, which means that the borrower may be able to take advantage of certain loan programs such as FHA loans or VA loans which typically have more favorable terms and lower down payment requirements (i.e. as low as say 3% downpayment for a conventional mortgage).

Disadvantages of investing in a duplex

Management responsibilities

As a landlord, you will be responsible for maintaining the property, finding and screening tenants, and collecting rent. These tasks can require a significant amount of time, effort, and expertise. Many landlords choose to hire a property management company to handle these tasks for them, but this comes with an additional cost.

Just a few examples of what you or a management company you hire would be responsible for:

1. Finding and screening tenants: You will be responsible for finding and screening tenants to ensure that they are financially stable, have good rental history, and are likely to take care of the property. This process can be time-consuming and may require background checks, credit checks, and reference checks.

2. Collecting rent: You will need to set up a system for collecting rent and enforcing late fees. You’ll also need to be prepared to deal with tenants who don’t pay on time.

3. Maintenance and repairs: You will need to maintain and repair the property to ensure that it remains safe and habitable for tenants. This includes regular inspections, making repairs when necessary, and handling any emergency repairs that may arise.

4. Legal compliance: You will need to comply with all state and local housing laws and regulations. This includes ensuring that the property meets health and safety standards, providing proper notice for any entry into the units, and providing all necessary disclosures to tenants.

5. Insurance: You will need to carry insurance to protect yourself and your tenants from potential liabilities. This includes general liability insurance and rental property insurance.

6. Bookkeeping and record-keeping: You will need to keep accurate records of all financial transactions, such as rent payments, expenses, and repairs. This will be necessary for tax purposes and in case of any disputes with tenants.

Tenant issues

Dealing with tenants can be easy, or you could end up with a nightmare tenant. You may have to deal with issues such as late rent payments, property damage, and evictions. This can be stressful and may require a significant amount of time and effort, especially in tenant-friendly jurisdictions like NYC or LA.

Just a few examples of what you might have to deal with:

1. Late rent payments: Tenants may not pay their rent on time, which can create financial difficulties for the landlord. This can also lead to legal proceedings if the landlord chooses to evict the tenant for non-payment of rent.

2. Property damage: Tenants may cause damage to the property, either through neglect or intentional acts. Landlords are responsible for making repairs and may have to spend a significant amount of money to fix the damages.

3. Noise and disturbance: Tenants may create noise or disturbance, which can be a problem for the other tenant, the landlord or the neighbors. Landlords may have to mediate disputes between tenants and may be held liable if they fail to address the problem.

4. Illegal activities: Tenants may engage in illegal activities on the property, such as drug use or prostitution. Landlords may be held liable if they are aware of these activities and fail to take action.

5. Eviction: In some cases, landlords may need to evict tenants for non-payment of rent or for violating the terms of the lease. The eviction process can be costly and time-consuming, and may result in negative consequences for the landlord.

6. Tenant complaints: tenants may have complaints about the property or the landlord, which can be difficult to address, and may lead to legal proceedings.

Maintenance and repairs

Owning a duplex means that you will have to pay for repairs and maintenance on the property. This can be costly, especially if major repairs are needed. Furthermore, you can count on being stressed out every time you get contacted by your tenant about something breaking.

Here are just a few examples of the things you’ll be responsible for:

1. Cost: Maintenance and repairs can be costly, especially if major repairs are needed. Landlords are responsible for paying for repairs and may have to spend a significant amount of money to keep the property in good condition. This is especially a problem today with the high inflation we’re facing, especially in skilled labor.

2. Time-consuming: Maintenance and repairs can be time-consuming, as landlords may have to schedule and coordinate repairs with contractors, wait for parts to be delivered, or deal with unexpected issues that arise.

3. Regular inspections: Landlords are responsible for conducting regular inspections of the property to ensure that it is safe and habitable for tenants. This can be time-consuming and may require the landlord to be on-site to access the property.

4. Emergency repairs: Landlords may have to deal with unexpected repairs, such as a broken water heater or a leaky roof. These repairs may need to be addressed immediately, which can be stressful and time-consuming. Remember that plumbers and other contractors may charge 1.5x or 2x their regularly rate for weekend and after-hours visits.

5. Keeping up with laws and regulations: Landlords are responsible for ensuring that the property meets all local and state health and safety standards and codes, this can be costly and time-consuming especially in states like New York with lots of red tape.

Vacancy

The potential for vacancy is a huge problem for any investment property owner. Not only will you lose what seemed to be a stable source of income, but you might have trouble finding a new tenant that will pay the rent and not destroy the unit.

Here are some of the things you might have to deal with:

1. Loss of rental income: When one of the units in a duplex is vacant, the landlord will lose rental income from that unit. This can be particularly challenging if the landlord is counting on that income to cover the mortgage and other expenses associated with the property. Be especially careful of leverage during a recession, as we head towards a housing downturn in 2023 and beyond.

2. Difficulty in filling vacancies: Filling a vacancy can take time, especially if the landlord is not able to find a suitable tenant quickly. This can result in a significant loss of rental income over time. This can be especially distressing when the market is weak and rent prices are decreasing, and landlords have to compete to lower prices.

3. Advertising costs: Landlords may need to spend money on advertising the vacancy, to find a tenant, which can be an added expense. Don’t forget about rental broker fees which can be up to 15% of annual rent!

4. Maintenance and repairs: When a unit is vacant, the landlord will still be responsible for maintaining and repairing the property, which can be costly. Imagine finding out about a water leak in your vacant unit days later because it’s unoccupied!

5. Unforeseen expenses: Vacant units can attract vandals, squatters, or other unwanted guests, this can lead to additional expenses such as eviction costs, repairs, or legal fees.

Financing

Although financing a duplex can be relatively easy if you are eligible for a conventional mortgage, it may be more difficult to secure financing for duplexes that have been converted from a single-family home or have been significantly modified. Furthermore, if the banks believe that the loan will be for an investment property from the outset, they may require a higher downpayment and/or higher interest rates.

Here are some of the issues you might face investing in a duplex:

1. Higher down payment: Lenders may require a higher down payment for a duplex than for a single-family home. This can make it more difficult for some investors to secure financing, especially if they don’t have a significant amount of cash on hand.

2. Higher interest rates: Investors may have to pay a higher interest rate on a loan for a duplex than for a single-family home. This can increase the overall cost of the loan and make it more difficult to turn a profit on the investment.

3. Stricter lending standards: Lenders may have stricter lending standards for duplexes than for single-family homes. This can make it more difficult for some investors to secure financing, especially if they have a less than perfect credit score or a limited credit history.

4. Financing a duplex that has been converted from a single-family home: It can be more difficult to secure financing for duplexes that have been converted from a single-family home, as lenders may be more cautious about lending on properties that have been modified in this way.

5. Financing a duplex that has been significantly modified: Lenders may be more cautious about lending on duplexes that have been significantly modified, such as a duplex that has been converted into a triplex or a fourplex.

Legal responsibility

As a landlord, you are responsible for ensuring that the property is safe and habitable for tenants, and that it complies with all local housing codes. If a tenant is injured on the property, or if the property is found to be in violation of housing codes, you may be held liable. This is a serious issue, especially if you do not have proper insurance coverage. And remember, just because you purchased real estate in a LLC does not mean you can’t be sued. Anyone can be named in a lawsuit!

Just a few of the things you may be responsible for:

1. Compliance with housing laws and regulations: Landlords are responsible for ensuring that the property is safe and habitable for tenants, and that it complies with all local housing codes. This can be a significant burden and may require a significant amount of time and money to ensure compliance.

2. Liability for tenant injuries: Landlords are liable for any injuries that occur on the property, if it is determined that the injury was caused by the landlord’s negligence. This can lead to costly lawsuits and potential settlements or judgments.

3. Discrimination laws: Landlords must comply with fair housing laws and must not discriminate against tenants based on protected classes such as race, religion, national origin, or disability. Violations of fair housing laws can result in significant fines and penalties. Agents and landlords can use services like Cribfox to comply with fair housing laws by sending and storing required disclosure forms.

4. Eviction laws: Landlords must comply with eviction laws and must follow the proper procedures for evicting a tenant. Failure to do so can lead to lawsuits and fines. Note that it’s extremely hard to evict in tenant-friendly states like New York, whereas states that respect property rights have an easier process (i.e. Florida’s eviction process).

5. Security deposit and rent laws: Landlords must comply with laws regarding security deposits and rent, such as the maximum amount that can be charged, the timing of the return of the deposit, and the notice requirements. For example, per New York’s 2019 Rent Laws, landlords are only allowed to collect a maximum of 1 month’s security deposit.

6. Keeping records: Landlords must keep accurate records and provide proper disclosures to tenants, such as lead-based paint disclosure, mold disclosure, bed bug disclosure, anti-discrimination disclosure & more.