So, you’re looking to get into real estate investing and you’ve set your eyes on a small multifamily property.
You know that real estate investing is a smart move, but that doesn’t mean it’s attainable.
With the usual deal needing 20% down, you could be looking at $40,000 on a $200,000 property.
We’re going to go over ways to invest in duplexes cheaper so you can build wealth faster.
Let’s go right to it.
House Hacking A Duplex
The strategy for beginners (or even seasoned investors) to get into a duplex cheaply is to house hack the property.
Side Note: We started buying rentals in Grand Rapids, Michigan when we lived there. We never used our FHA loan on those properties. So, when we recently moved to Atlanta, we purchased a duplex with an FHA loan to house hack and eliminate our housing expenses.
Buying a duplex and living in one side allows you to get into the property with a 3.5% down payment vs a 20%-25% down payment that conventional financing forces you to use.
On a $200,000 duplex, putting down 3.5% ($7,000) instead of 20%-25% ($40,000 – $50,000) is a savings of $33,000-$43,000 just in the down payment.
The real added benefit is that you are able to eliminate your housing expenses. If you live in one side and rent out the other, the rents from the rented unit should be covering the costs of your mortgage.
Let’s assume that your average rents where you live are $1,400. Eliminating that rent payment saves you $16,800 per year. This allows you to more quickly save up for your second rental property.
The Benefits of Buying a Duplex
Obviously, you should know the pros and cons to investing in a duplex.
If you’re considering house hacking a duplex so that you only have to put 3.5% down, you’re going to have to be a live-in landlord.
(You’re going to catch a lot of crap for this from people who don’t understand your ambitions. We all go through it.)
If you want to stop renting and “throwing away your money” as my grandparents put it, buying a duplex can kill two birds with one stone.
You get the benefit of not throwing away money, building equity, home ownership, and you still have mobility. Mobility is important in case you want to relocate for work, lose your job, or meet someone special who isn’t local.
Depending on your goals, you can use the duplex financials to:
- Reduce your personal cost of living.
- Snowball your savings into your next property.
You could even do both.
One reason that investors buy duplexes as a house hack is the low barrier to entry.
With a typical investment, you need at least 20% down.
House hacking a duplex allows you to bring so much less money to the table to get into a rental property.
The caveat is that there are guidelines you have to live by (literally) when you are house hacking.
With an FHA Loan, you will have to live in the property for a minimum of one year.
Side Note: I found out recently as I was getting financing for our latest house hack that there is zero leniency on the rules when you own rentals and are trying to use an FHA Loan to acquire another property. For example, we were looking at a property that wouldn’t have a vacant unit until 3 months after our projected closing date. The lender would not budge on letting us buy it unless a unit was vacant since we were ‘seasoned investors.’
After the 12 months are up, you can move out of the property if you decide you want to.
Some other benefits to house hacking a duplex or small multifamily are:
You can use your rental income to begin pursuing financial freedom.
When you purchase a duplex, you can start saving or snowballing your savings and rental income into your next rental investment.
If you’re able to save $15,000 a year from your W2 job and you are paying $1,500 per month in rents, let’s see what your financial capacity is to invest by house hacking a duplex.
$15,000 a year from your W2 is, well, $15,000 a year.
Eliminating your $1,500 per month rent sets you up to save $18,000 per year.
Combine those, and you have $33,000 in savings after your first year.
Saving for a $200,000 duplex with a 20% down payment? You’ll need $40,000.
So, just after a single year, you can purchase your second duplex.
Let’s say that your net rental income for that duplex is a total of $500 per month. That’s another $6,000 per year. (This doesn’t include your rental property tax breaks that you’ll receive.)
In your third year, you can save enough to purchase your 3rd duplex.
And in your fourth year? You get the point.
House hacking a duplex can catapult you into financial freedom.
You parlay rental income into buying yourself a nicer home.
You really want to buy a house. I get it. We all want a place to call home.
But hear me out.
If you house hack a duplex, you can parlay that money into a much nicer home than what you could originally afford.
Let’s imagine you are able to save up the $33,000 per year. But instead of buying a second duplex, you just bought a house.
Let’s say you waited 3 years to buy your primary house and you saved $100,000. Imagine being able to save $100,000 to put towards a home in your 20s (or even your 30s).
That can afford you a much nicer home.
But that’s not the only benefit.
When you are a landlord for 2+ years, you can count your rental income as your own personal income, which decreases your debt to income ratio.
That means that you can actually use your rental income to qualify for a larger loan.
(You can even use that rental income to pay for a portion of your monthly mortgage.)
Side Note: We have friends from my first engineering job that house hacked a duplex, bought a second one with their savings, and then bought their primary house to live in. The income from their two duplexes literally pays for the mortgage on their house. The tenants are paying down the mortgages on all three properties.
You get some sweet tax benefits.
With a rental property, you get numerous landlord tax benefits.
You get to write off:
- mortgage interests
- repairs and maintenance
- capital improvements
If you want to learn some easy to understand, but advanced tax strategies that savvy real estate investors use, check out this book.
Obviously, house hacking a duplex is a smart move. But if you (or your significant other) are still on the fence about living next to your tenants, remember that it’s only for a year.
But there are drawbacks to it for anyone.
Let’s get into those real quick.
The Drawbacks of Buying a Duplex
While house hacking a duplex is a super smart strategy, it does have it’s drawbacks.
Some of the largest struggles you’ll potentially have as a live-in landlord/owner are:
You may not be able to set boundaries with your tenants.
You’re thinking it, so let’s go there.
Imagine your neighbor clogging their toilet at 3 AM after a nigh out at Taco Tuesday.
Instead of unclogging it themselves like responsible adults, they come bang on your door.
Just don’t answer, right?
Well, they keep banging. Turns out, the toilet (and tacos) is overflowing too.
Finally you get out of bed and go spend all morning cleaning up their mess. By the time you’re done, it’s time to go to work.
Sounds fun, ammirite!?
There is a chance that that can happen.
My advice? Set hours for your availability. Yeah, you can do this informally, but you always want to have these things in writing on the lease.
Better yet, have the lease state that any calls after hours are subject to an emergency fee. If you’re getting up at 3 AM, why not get paid for it?
Side Note: None of this is legal advice. Seek an attorney’s advice (obviously).
Need to evict a tenant?
Even the best screening produces tenants that you need to evict.
It’s rental property ownership. It happens.
But it gets even better when you live next door to the tenant that you are kicking out of the house.
You’re filing an eviction on them. It’s on their record. The sheriff may have to escort them off the property.
They are not happy.
But who do they blame and take their anger out on? You.
You’ll toughen up though.
Bad tenants suck when you’re sharing walls.
Loud music. Stomping feet. Couples arguing. TV blaring. The works.
You get to deal with it all.
But it doesn’t stop there.
You get to deal with late payments. Tenants try to befriend you and use that friendship to get leniency on their late payments.
We’ve dealt with it all.
Screening your tenants is super important. We can’t stress that enough.
Here’s the best book we have read on screening tenants. It provides you with a step-by-step process for finding the best tenants. You also get leases, applications, and various other forms that you will need.
How To NOT Manage Your Tenants
So, here’s a little tip that I schemed up for myself.
Have a property management company manage the other unit that you are renting out.
This way, the tenants won’t know that you are the owner. They will think that you are just another tenant having to deal with the same crappy landlords that they are.
You won’t be singled out. You won’t have anger taken out on you. Life will be a little easier on you.
The only thing that you will have to work around on this one is if you keep the tenants that are in the property when you are doing your walk throughs and inspections. They will see that you are the person purchasing the property and you can’t hide.
Deciding Whether to Buy a Duplex
You need to figure out your end goal before you buy a duplex.
- If you’re only looking to have your mortgage covered with the rental income, there’s other types of properties that you can purchase to do this.
- If you want to start building a multi-family rental portfolio, house hacking a duplex is the best way to get started.
The duplex that you plan to live in needs to have a basic human need – you need to feel safe.
As you shop for rental properties, there will be some neighborhoods that you pull into and your gut tells you instantly to turn around.
When shopping and touring the duplex, walk around the neighborhood and just get feel for the vibe it gives off. Do you feel safe? Are things a little sketchy? Are there groups of people hanging out on the corner? Is there a lot of traffic to the houses?
If people are outside, introduce yourself and just ask what they like and, especially, dislike about the neighborhood.
But at the end of the day, it’s all about the financials.
Before you buy the duplex, you want to make sure that it’s actually a good rental property for the long term. You don’t want to buy a property that allows you to eliminate your mortgage, but that has negative cash flow when you move out. You’ll be shooting yourself in the foot.
To learn how to find and analyze neighborhoods and the rental property to maximize your cash flow, check out this book on Rental Property Investing. I bought my first rental 3 months after reading this and it kicks off ~$600 in cash flow per month.
Over To You
Are you thinking about buying a duplex to house hack?
What are fears that you have?
More importantly, how are you overcoming those fears?
What market are you house hacking in?
Let us know in the comments below!