Investing in real estate is usually a great way to increase wealth and generate passive income. Yet I would bet most people don't even consider it because they assume it is not possible for them. With a little planning and savvy house hunting, it might be easier than you realize to get started in real estate as an investor.
One of the best ways to get your foot in the door is by purchasing a duplex.
In this post, we'll briefly cover a few topics:
- The Pros and Cons of duplex ownership
- Financing Options
- Tips on what to look for
PROS AND CONS OF DUPLEX OWNERSHIP
Before we get into if and how you can afford to purchase a duplex, I'd like to share with you the value of purchasing a multi-family unit.
- You can live for free or cheap if you choose to occupy one side of the duplex and rent out the other side.
- A great introduction to real estate investing and property management.
- Colorado Springs is a strong rental market.
- Your mortgage is a fixed cost, but rental rates will continue to increase.
- If you utilize a 15-year mortgage, you will have a decent income stream in a relatively short amount of time.
- Cash flow for as long as you own the property (and have renters).
- Only need 3.5% down (FHA).
- Duplexes can be exempt from larger multi-unit regulations.
- Living on one side is convenient in maintaining and managing the property.
- It is possible to use the potential rental income for financing purposes, making it more affordable than most folks realize. (Check with a local loan originator for details).
On the flip side of the coin, remember that:
- If you live on one side, it may be convenient, but so convenient that your tenant never leaves you alone.
- Locations and neighborhoods that offer duplexes are limited.
- When looking at the locations, consider the type of tenant you will attract.
- You are responsible for general repairs and will need to keep a budget for that.
- Higher insurance costs
- You are a landlord. Be aware of your local property management laws. Or hire a property manager.
- The potential for higher HOA fees.
Everything in life has pros and cons, however, if you are willing to live on one side for a few years, purchasing a duplex now may prove to be a wise choice in the future for cash flow purposes and equity.
DUPLEX MORTGAGE LOANS
For the purposes of this article, we are going to assume that you will occupy one of the units. Obtaining a loan for an owner-occupied duplex is considerably easier. However, you may not have a non-occupying co-signer for a duplex.
One of the best parts of determining if you can afford to purchase a duplex is that if it already has a tenant, you can use that rental income as part of qualifying for the loan! However, every jurisdiction is slightly different on how this is handled so be sure to check with a local loan originator. (For Colorado Springs, we recommend Sheila Endres 719-339-4664).
If there is not a current renter you will need to talk with the loan originator to determine the best course of action and if there is a possibility to include potential rental income as part of your income consideration for qualifying for a loan.
In El Paso County, Colorado, 75% of rental income is considered toward your loan qualifications. Also, if there is not a current renter, you must have a signed lease and a deposit in the bank at the time of your closing.
Here are a few other items to consider:
- Can choose from FHA, VA, or Conventional loan options
- FHA owner-occupied loans only require 3.5% down.
- Owner must occupy the property for a minimum of 1-year (FHA)
- May use gift money for the down payment (FHA)
- The best rates are for buyers with a credit score of 740 or higher.
- There are FHA limits to the amount you can borrow. Click here for more info.
TIPS BEFORE YOU BUY A DUPLEX
BiggerPockets.com is a fabulous resource for those looking to enter the real estate investing world and they have a lot of information regarding purchasing multi-family units. I compiled several of their suggestions, along with my own, to help steer you in the right direction before you begin your hunt for a duplex.
BiggerPockets suggests that there are 3 main considerations to buying a multi-family unit: Location, Quality, and Tenants. I'll address all three in the tips below.
- Remember location choices are limited. Consider the neighborhood and the type of tenant you want to attract, keeping in mind that higher paying tenants also come with a higher price tag and expenses, which can result in a lower cash flow. Make sure you crunch numbers to make sure your purchase is a good choice in the long-term.
- Don't just shop for a duplex - look for a great deal! If you are truly wanting an investment that will generate good cash flow, you need to take the extra time to look for a good deal. Like a bank repo/foreclosure, or someone who wants to get out of property management.
- Make a list of your criteria. Think through what you want.
- Use word of mouth/networking to get the word out that you are looking for a good deal. *Let me know what you are looking for and I'll keep an eye out for you as well!*
- Figure in renovation costs, if applicable
- Get pre-approved.
- Familiarize yourself with tenant-landlord laws. Property management can be tricky if you are not familiar with the regulations.
- Consider if you will manage the property yourself or hire a professional Property Manager.
- Find out what the property taxes will be and insurance on a duplex.
- Understand cash flow. For this to be a good investment, you need to figure out the expenses and potential cash flow. You won't live there forever, so make sure it is a good deal after you move out. Click here for a Rental Property Calculator.
In addition, make sure the unit is legally permitted as a multi-unit dwelling. Research rental rates for your neighborhood and occupancy trends. I can help you with this.
Colorado Springs has a very strong rental market, especially with the military presence. If you are in the military, you may want to consider the benefits of purchasing a duplex. You can establish a cash flow while you are state-side, and continue or increase your cash flow should you be deployed. Let's get together and talk about the options available to you.
Whether you are looking for your first home, empty nesters looking to generate a cash flow for your retirement years, or want to get started as a real estate investor, purchasing a duplex can be a wise and realistic option for you.
I would love to help you with any questions you may have and in your search. Contact me at 719-321-0800 and we'll grab some coffee!