Real Estate

Two incomes, one roof? Duplex offers a workable path to homeownership.

"I’ve been preaching for years that cash-flowing real estate is one of the ultimate investments due to the ability to leverage, receive cash in your pocket each month, and the tax benefits."

Sky-high interest rates make paying off a home loan a steep climb. Associated Press

December 14, 2023

Americans are feeling queasy about house buying.

Property has enjoyed a special place in the culture, long described as the “gateway to the middle class,” a “pillar of the American dream,” and other similarly grand epithets. Yet a potent cocktail of market factors, from shrinking inventory, skyrocketing prices, and persistently high interest rates, is making the property Kool-Aid almost undrinkable.

A whopping 84 percent of respondents in Fannie Mae’s latest survey on housing sentiment say now is a bad time to purchase a house, a record high. Just 16 percent believed it was a good time to buy, matching the all-time survey low set last year.

“Mortgage rates persistently over 7% appear to be deepening the malaise consumers feel about the home purchase market,” Doug Duncan, Fannie Mae’s chief economist, said. “High mortgage rates surpassed high home prices as the top reason why consumers think it’s a bad time to buy a home, a survey first.”

Sky-high interest rates make paying off a home loan a steep climb. Homeowners could help by having some extra cash flow to help pay off the mortgage payments. Most home buyers live in the place they’ve purchased, forfeiting the accumulation of rental income. Yet another housing strategy is open to those who want two for one — a duplex.

Those who struggle to fathom affording one property may feel taking on two at once sounds like they’re biting off more than they can chew. Yet, there are unique qualities that make duplexes a potentially lucrative entry strategy. Having a tenant live next door may be an optimal way to increase your residual income and accelerate the development of your property portfolio.

Looking closer at this unique property type can open up new avenues for aspiring homeowners.

Double dip?

A typical duplex refers to two housing units that share a common wall. This enables there to be two sets of people living on either side of the wall, with separate entrances and postal addresses, creating two separate occupancies.

Some famous “finfluencers” have are fans of the duplex, like Robert Kiyosaki, who is known for his conviction that assets must generate cash. The author of “Rich Dad, Poor Dad” wrote on in 2021 that investing in these property types is a great retirement investment strategy.

“I’ve been preaching for years that cash-flowing real estate is one of the ultimate investments due to the ability to leverage, receive cash in your pocket each month, and the tax benefits,” he wrote.

Others, like Dave Ramsey, see more potential trade-offs. The famous radio jockey has emphasized that while duplexes can generate more rental income, they appreciate less in total value. The negatives are less appreciation.”

“Just know your upsides and your downsides if you’re planning on moving into a duplex and doing this,” he wrote to one aspiring duplex owner in 2019. “I’ve owned several duplexes in my life, but I’ve always done much better with single family homes… as a rule, they appreciate faster.”

Home with benefits

There are unique tax benefits to duplexes, too.

Many home buyers know about standard tax write-offs, such as deducting the mortgage interest for a house. If you rent out a duplex, you get to write off expenses for that half of the property, too.

“You can write off all of the costs that take place on your Schedule E form,” David Hryck, a New York City tax lawyer and personal finance expert, previously told Forbes. “These could be fees accrued to rent the place out or even manage the property. All are completely tax-deductible.”

Other deductible expenses include any repair costs made to the rented part of the duplex and shared utility bills.

There are also advantages to mortgages. Lenders typically grant better interest rates to owner-occupied properties. With a duplex, a loan applicant may be able to unlock a lower rate if they intend to live in one of the units. They may also be able to borrow more money since the bank will see the future rental income as an additional source of income beyond their salary.

An ‘appreciating’ challenge

Yet, like a duplex itself, there are two sides to this property type. There can be setbacks, some of which are simply the inverse of the proposed benefits.

Oftentimes, aspiring owners of a multifamily home may have issues with financing their mortgage. Lenders may see it as a riskier proposition since the borrower is taking on the task of paying off two places at once. Although you can use rental income to accelerate paying off the loan, there is a risk with relying on tenants; they may not pay consistently. There is also “vacancy expense” bites into the borrowers’ ability to repay. For this reason, a larger down payment of 25% or more of the total value.

Heading for the exit ramp? It may be harder to move on from a multifamily home should the time come to sell the property. Since tenants have legally enshrined rights, it may take some time to vacate them from the property. To give the new owners a blank slate, it is probably best to sell only when there are no tenants living on site before putting it on the market, which limits options when timing the listing.

Also, as multifamily home designs optimize cash flow, investors, rather than homemakers, will typically find them more attractive. This may shrink the pool of prospective buyers as compared with typical one-family homes, and suppress its price value on the market.

As we can see, there are many dimensions to consider when buying a duplex. By researching the property type thoroughly, and engaging with a financial planner on the details, aspiring homeowners can better assess whether it is a worthwhile investment for their circumstances.